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How slow GDP growth affects you

business Updated: Dec 04, 2012 23:17 IST
Gaurav Choudhury

The Indian economy grew by 5.3% in July to September, buffeted by domestic political compulsions, dipping investments and an uncertain global economy. HT explains the linkages between inflation, industrial slowdown, government deficits and employments and salary raises.

What does the latest data on India’s economy tell us?
India’s economy has grown by 5.3% in July to September 2012, lower than the previous quarter’s 5.5% growth, national income data released last week showed.

What is pulling down growth?
The manufacturing sector, which accounts for 17% of India’s GDP, grew 0.8% in July to September 2012. Agriculture grew a moderate 1.2% in the quarter, compared to 3.1% a year-ago.

Why is the manufacturing sector slowing down?
The manufacturing sector’s contraction during the quarter confirms what most analysts had feared: The Reserve Bank of India’s (RBI’s) bitter medicine to raise interest rates to cure inflation has not tamed prices, but cast side effects on growth, with firms holding back planned capacity expansions.

To what extent has investment come down? Can it be quantified?
Gross fixed capital formation (GFCF) — a proxy to measure fresh investments by companies — stood at 33.8% of GDP during the quarter against 33.4% a year ago. Hurt by a policy logjam, growth in investment demand has remained nearly flat over the past few months.

What does the slowdown mean for us?
Sluggish industrial growth means lesser job opportunities and smaller pay hikes as corporations stall investment plans, slow down hiring and prune wage bills. Shrinking demand has hit companies hard, which are looking for options to keep revenues high, maintain reasonable profits with minimal employee layoffs. Besides, weakening corporate profitability is hurting investor sentiments. A slowing economy has resulted in lower tax collections, limiting the Centre’s ability to spend on welfare schemes and upsetting fiscal plans.

Some experts have blamed domestic uncertainty for the slowdown. Why?
Policy pronouncements such as a retrospective tax on older corporate transactions like the Vodafone-Hutch deal and uncertainty over the general anti-avoidance rule (GAAR) has dented India’ image as an investment hotspot, sparking fears among global investors. As foreign investors, fearing this would choke foreign investment into the country, pull out from Indian equities, the rupee has fallen. A sliding rupee makes imported raw materials and overseas loans costlier, hitting companies further.

How have high interest rates hurt consumption?
The tug-of-war between sliding growth and rising inflation — which has forced the RBI keep interest rates high — has severely 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. Costly borrowings and inputs have dampened investments as firms defer capacity expansion plans, hurting job prospects. Companies have pruned wage bills to cut corners in difficult times, offering lower salary hikes that barely take care of rising prices. These, in turn, have affected consumption demand as people have put off planned purchases of goods.

Why has the RBI raised interest rates?
The RBI uses monetary tools to stymie demand and cool prices. A higher repo rate — the rate at which RBI lends to banks — currently at 8%, pushes up banks’ borrowing costs, prompting them to increase interest rates for home, auto and corporate borrowers. A higher reverse repo rate — the rate at which the RBI borrows money from banks — again enables the central bank to suck cash from the system to stymie demand and cool prices. It currently stands at 7%.

What is expected next?
All eyes will be on the RBI to see whether it slashes interest rates further when it presents its mid-quarter monetary policy review later this month. India’s overall consumer price inflation - a more realistic cost-of-living measure because it captures shop-end prices - remained high at 9.75% in October. Two sets of data — factory output data given by the Index of Industrial Production (IIP) and inflation data — will largely determine whether the RBI will announce a cut in interest rates in its mid-quarter review later this month.