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Investment crunch, low demand stifle growth

business Updated: Feb 07, 2013 22:59 IST
HT Correspondent
HT Correspondent
Hindustan Times
India’s economic growth

Behind the sharp slump in India’s economic growth that is set to hit a 10-year low in 2012-13 are low consumption demand and weak investment activity — two edifices of the India growth story.

Households putting off spending are warning signals of an economy-wide squeeze that is forecast to take growth down to 5% — and its clearest indications are available in a market or a mall where footfalls and sales are slower.

Auto sales growth crawled at 4.6% during April-December 2012 against 12.5% last year supporting the view that high inflation and interest rates are denting discretionary consumer spending.

Private consumption is estimated to remain flat at 59.7% of GDP (in current prices) against 59.2% last year, implying people are putting of planned purchases due to high interest rates.

Tight monetary conditions and high inflation have hurt investment activity. Gross fixed capital formation, a proxy for investment activity, has slowed down to 29.9% of GDP (at current prices) against 30.6% last year.

Data from 47 banks accounting for about 95% of all loans show than “non-food credit,” which includes retail loans for houses and cars, grew at a much slower 8.6% in April-December 2012 against 10.4% last year.

A recent Reserve Bank of India (RBI) survey shows that high interest rates have dented consumer confidence.

Last week, the central bank cut the repo rate-its key lending rate at which it gives out funds to banks-by 0.25 percentage points to 7.75%, the first such reduction in nine months.

“My wife and I had planned to buy a new car around Diwali but neither one of us has got a bonus this time around and the raise too was below what we had expected. Besides, the interest rates are also high. ,” said Anuj Anand, a Mumbai-based mid-level executive working in a multi-national company.