India’s economic growth has plunged to a 9-year low of 6.5% in 2011-12, hit by political compulsions, dipping investor sentiment and an uncertain global environment. What does it mean for you? HT explains the linkages between inflation, industrial slowdown, government deficits, employments and salary hikes.
What does the latest data on India's economy tell us?
India’s economic growth crashed to a 9-year low of 6.5% in 2011-12, and by 5.3% during the January-March quarter, the worst in 36 quarters, national income data released last week showed.
What is pulling down growth?
The manufacturing sector, which accounts for 17% of India’s GDP, contracted by(-)0.3% during January-March. The services sector grew by a moderate 8.5% in 2011-12, compared to 9.2% in the previous year.
The sector’s contraction during January-March 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. Moreover, firms are also holding back planned capacity expansions, leading to slow growth.
To what extent has investment come down? Can it be quantified?
Gross fixed capital formation (GFCF) — a proxy to measure fresh investments by companies — actually fell to 28.6% of GDP during the last quarter of 2011-12 compared to 29.4% a year earlier. Hurt by a policy logjam, growth in investment demand dropped to 5.5% in 2011-12 against 7.8% in the previous fiscal year. 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 to 4.2% in April 2011.
What the slowdown means for you?
Sluggish industrial growth means lesser job opportunities and smaller pay hikes as corporations stall investment plans, cut down on hiring activities 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 sentiment. Moreover, a slowing economy has resulted in lower tax collections, limiting the government’s ability to spend more on welfare schemes and upsetting fiscal plans.
Policy pronouncements such as a retrospective tax on older corporate transactions such as the Vodafone-Hutch deal and uncertainty over general anti-avoidance rule (GAAR) has dented India’s image as an investment hotspot, sparking fears among global investors. As foreign investors, who say this would choke investment into India, pull out from Indian equities, the rupee has slid. A fall in the rupee’s value 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 to keep interest rates at high levels — has severely hurt consumption demand, a strong edifice of the India growth story. Private consumption growth dropped sharply to 5.5% in 2011-12 from 8.1% in 2010-11. Costly borrowings and inputs have also dampened investments, with firms defering capacity expansion plans, thereby 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 pushes up banks’ borrowing costs, prompting them to increase interest rates for final home, auto and corporate borrowers. A higher reverse repo rate means the central bank would suck cash from the system to stymie demand and cool prices. It currently stands at 5.75%
What is expected next?
All eyes will be on the RBI on whether it slashes interest rates further when it presents its monetary policy later this month.
India’s overall consumer price inflation — a more realistic cost-of-living measure because it captures shop-end prices — rose 10.36% in April. In cities, it was even higher at 11.10%, compared with 9.86% in rural India, signalling the inability to control household inflation, partly stoked by a falling rupee , which made imports costlier.