India’s economic growth slumped to a 9-year low of 6.5% in 2011-12, confirming fears of a widespread industrial slowdown caused by a demand and investment squeeze arising from a host of factors that include a local policy logjam, high interest rates, sluggish exports amid a European economic crisis and a global surge in commodity prices.
The severe slowdown hit the country as policymakers struggled to turnaround the economy buffeted by domestic political compulsions.
Gross domestic product (GDP) during the January-March grew by a worrisome 5.3%, the lowest since January-March 2003, hit by a staggering manufacturing sector that contracted by 0.3%, data released on Thursday showed. Anatomy of a slowdown
Experts blamed domestic uncertainty behind the sudden turnabout in an economy, which until not so long ago was the destination global investors flocked to.
Gross fixed capital formation (GFCF) — a proxy to measure fresh investments by firms — actually fell to 28.6% of GDP during the last quarter of 2011-12 as compared to 29.4% a year earlier. Hurt by a policy logjam, growth in investment demand dropped to 5.5% in 2011-12 as against 7.8% in the previous fiscal.
The tug-of-war between sliding growth and rising inflation — which has forced the RBI keep interest rates high — has hurt consumption demand, a strong edifice of the India growth story as reflected in the private consumption growth which dropped sharply to 5.5% in 2011-12 from 8.1% in 2010-11.
Basic goods output growth, which comprises of infrastructure sectors such as crude oil, natural gas, petroleum refinery products and fertilisers, appear to be slowing down considerably with the growth rate of eight infrastructure sectors plunging to 2.2% in April, compared with 4.2% in April 2011.
Most recently, the budget provision to empower taxmen to scrutinise older corporate deals has sparked fears among global and domestic investors, who say this would choke foreign investment into India.
Last year, political compulsions had coerced the government to quickly bottle up the flurry of reforms including allowing FDI in multi-brand retail and pensions.
“The sharp deterioration in the growth momentum underscores the necessity of immediate actions to be undertaken by the policymakers in order to avoid an entrenched and prolonged slowdown," said Upsana Bhardwaj, India Economist at ING Vysya Bank.
All eyes will be on the Reserve Bank of India (RBI) on whether it slashes interest rates further.
India’s consumer price inflation, a more realistic cost-of-living measure, rose 10.36% in April.