The economy is cooling off rapidly. Gross domestic product in April-June 2011 grew by 7.7%, which although considerably lower than the 8.8% in the first quarter of 2010-11, kept India trundling on a decent growth trajectory as far as the rest of the world was concerned. But the latest data set shows GDP growth slowing to 6.9% in July-September 2011 from 8.4% a year ago.
Obviously Indians are buying more of everything from soap to software, but quite a few sectors are feeling the pinch of rising interest rates. Thus manufacturing, which soaks up a lot of debt, is down to 2.7% growth from the 7.8% in the same period a year ago. Again capital-intensive mining has actually shrunk by 2.9% against a growth of 8% a year ago. The other big dip is in construction, from 6.7% to 4.3%, a worry point for a nation that has ambitious plans to ramp up its physical infrastructure. Agriculture and services, however, are holding on to trend growth rates.
Much of the loss of momentum is deliberate, induced by a tightening of credit lines. It costs R3.75 more to borrow R100 in India than it did 18 months ago. The Reserve Bank of India has risked growth to tame inflation, and although it announced a pause after 16 rate hikes in 18 months, prices refuse to fall in line. With wholesale inflation clocking 9.73% in October 2011 — the 11th month when it has stayed above 9% — prices are still growing too fast. Unless significantly more demand is deflated, the central bank will have little reason to change its hawkishness on interest rates. But monetary tightening has its limit, and we seem to be heading towards it.
The demand-side picture, however, remains fairly robust. Consumption over the second quarter of 2011-12 stood firm at 59.5% of the GDP. Government spending too was steady at 10.7%. But investment is taking a knock. It is 2.3 percentage points down from a year ago at 30.5%. Costly money is crowding out companies’ plans to increase capacity even as the fiscal deficit has crossed three-fourths of the target for the year in the first half. With no signs of temperance over government expenditure, the rest of the economy is getting squeezed. This poses significant risks to future growth. Some of the hardship is showing up in the trade deficit, which having ballooned to nearly 9% of GDP in the first quarter of this year has halved to a more respectable 4.6% as import decisions get put off.