Growth pangs

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India’s GDP growth is slowing. It now turns out that this year may see 1% slippage against the estimated 7.5%. Are we slipping back into the historical Hindu rate of growth of the ’70s?

Growth pangs
Double digit-growth for India? Even Montek Singh Ahluwalia thinks that’s impossible. He must know – and lots of others agree that the deputy chairman of the Planning Commission is right.

Most think it will be a miracle if India manages to somehow cling on to the present GDP growth rate, if that. At one point India was the second fastest growing economy in the world after China. That vanity already lies in tatters. Indonesia has overtaken us.

In this year’s budget the original GDP growth target was 7.5 per cent. But as the year progressed, this looked beyond reach: the first half fell far short of target, the actual toted up was just 5.4 per cent.

Even finance minister P Chidambaram admits growth won’t go beyond 5.5-6 per cent when the year closes in March. C Rangarajan, the prime minister’s economic advisory council chairman, once believed growth will touch 6.7 per cent for the year but has now watered down his expectations to six per cent. Count him in as among the few optimists.

The story was so different not very long ago. In 2006-07 growth was a scorching 9.6 per cent. Even in 2008-09 when everyone expected to hit the rock bottom or in 2010-11 things were not as bad, with 8.4 per cent clocked.

If the current year ends in a whimper, the chances of growth doing any better in the coming years are as bleak. Ahluwalia, quoted by the Financial Times, expressed the hopelessness with a bit of sarcasm thus: “In the political environment (of coalition politics) we have, it will be very difficult to get to nine per cent (annual GDP growth between 2012 and 2017). To people who say we could get to 10 to 11 per cent but for the pusillanimity of the government, I say, Wake up and smell the coffee.”

Indeed, the pessimism is so thick there is whispered talk in the corridors of power if India is in danger of relapsing into the dreaded Hindu rate of growth of three per cent.

India sure seems to be in slumber, and nothing can wake up the sleeping giant. Growth in the first half of this year being not very encouraging, all eyes are on the data for the second half. If we were to touch the diluted target for the year, the second half must show double-digit economic expansion. Most unlikely.

Morgan Stanley Asia’s economist Chetan Ahya expects the year to end with 5.4 per cent, marginally better than its original estimate of 5.1 per cent but still not good enough.

Both external and internal factors blight our growth and will continue to do so for a while. Among the external reasons are exports, which give a quarter of our GDP but have been a let down. Exports depend on external demand, which continues weak.

Export growth in April-October decelerated to 6.18 per cent, despite currency trends that favour exports. The poor plight of European economies is the main reason.

With negative growth in two consecutive quarters, the euro zone is technically in a recession. No signs are available of an early recovery in demand in the region.

Thus, a quarter of the economy as represented by exports is unlikely to see a quick recovery. This is bound to tell on GDP.

Among the internal factors the biggest is the halt to investments. A look at a key indicator, gross fixed capital formation (GFCF), tells us its growth has slowed to 4.06 per cent from 5.02 per cent last year. Corroboration is available from credit offtake data.

Non-food credit offtake so far this year is Rs 2,55,000 crore. Even in the global crisis year of 2008-09 non-food credit offtake was Rs 2,66,000 crore.

In other words less money is being lent out – not a good thing for asset creation and production, because, as economic wisdom goes, for every one per cent growth in GDP, credit has to grow by at least 2.5 per cent. This is not happening.

Some efforts have been made to shore up foreign investment flows but these have not yet produced encouraging results.

BNP Paribas Asia’s chief economist Richard Iley says the investment cycle needs to be “kick-started” if growth has to be revived. The question, aptly posed by a public sector bank economist, is: how do you do that when there are no takers for credit? Because things are not looking up in the world outside, no one in India is willing to commit fresh investments and actually make them. They all are waiting for external demand to pick up.

Absence of investments blights manufacturing. In the second quarter, the manufacturing sector was nearly static with growth of just 0.8 per cent. This is a big drop from a respectable 9.8 per cent growth in the corresponding quarter last year when the US and Europe saw a brief revival from their own credit crisis that followed the collapse of Lehman Brothers.

Underperformance has marked manufacturing this year. The index of industrial production, which captures trends in factory output, grew by just 0.1 per cent in the first half (against 5.1 per cent growth last year).

Normally, companies crank up production and build up inventories in September for festive season sales. This time output actually shrank by 0.4 per cent.

Growth in factory production depends much on capacity expansion. The outlook on this front is not very good. This is because output of capital goods, plant and machinery – essential for any factory producing anything – contracted by 13.7 per cent in the first half.

Any turnaround in capital expenditure takes time and gets reflected with a lag. Industrial production, therefore, is expected to remain subdued even in the second half, according to Angel Broking’s economist Bhupali Gursale.

Other pointers seem to substantiate his point. Energy, for one. Ideally if GDP grows, energy demand also grows. To achieve a one per cent increase in GDP, energy consumption must grow by at least 1.8 per cent. But energy demand has been low this year.

Fuel oil, one form of energy, has seen flat demand, an indication of which is available from crude oil imports. Over the past three years these imports have remained flat at about 2.9 million barrels a day.

Growth in generation of electricity, which drives factories, too has slowed -- to 4.6 per cent in April-September from 9.5 per cent in the corresponding half lat year. Part of the reason is that our dams produced less power because they did not receive as much water as last year.

Till September-end the water levels in reservoirs linked to hydel turbines were enough to generate 23 billion units of electricity. On the same date last year the potential was 28 billion units. Normally, hydel shortfalls are made good by stepping up thermal power generation. But coal shortages have ensured that thermal stations are generating at a plant load factor of 68 per cent, down from 71 per cent a year ago.

So the grids have seen less electricity flowing through them. In times like this captive diesel generation helps. This should have spiked this year. However, we have the evidence of flat imports of crude to conclude that this has not happened.

Agriculture too presents no sunshine. Agriculture accounts for 14 per cent of GDP. This year irregular and delayed monsoon in many parts put paid to hopes of a big jump in farm produce. The agriculture ministry has scaled down kharif output (including rice) to 117 million tones. Last kharif had yielded 130 million tonnes.

Rice output alone is estimated to have slipped by six million tonnes this time, according to advance estimates made by the ministry. Year 2011-12 saw a bumper farm output of 257 million tones, a level unlikely to be attained this year unless rabi crops come to the rescue.

It will be difficult, says India Bulls Securities’ commodity analyst Badruddin Khan, since rabi sowing is less this year. “The year’s output will certainly not be higher than last year’s,” he adds. Rabi crops have been sown only in 37.4 million hectares, 1.1 million hectares less than last year.

That leaves the services sector to shore up GDP. The sector gives 70 per cent of India’s GDP. A big part of services is the IT business, which mostly banks on markets abroad for revenue. And we all know Europe or the US is not in the best of health.

Infosys’s chief executive officer S D Shibulal in an interview to this paper admitted that “the business environment remains challenging” for the company’s clients. “That effects their ability to take decisions… and this in turn impacts us.”

So, when Nasscom says it expects 11 per cent growth this year to $100 billion from $89 billion. The optimism is not shared by all.

Other services like trade, hospitality, transport and communications have seen growth slump to 4.7 per cent in the first half. This was a steep fall from 11.6 per cent in the first half last year.

Fortunately, financial services, insurance, real estate and business services and community and social services grew by a healthy 10.1 per cent. What kept this afloat was mainly the segment of this services group.

And for that, thanks to the government, the main vector of social sector expenditure, which grew by 7.7 per cent, faster than 4.7 per cent a year ago.

Hospitality, transport and communications comprise almost half of the services sector. It is slump in them that is worrying. Espirito Santo Securities economist said Deepali Bhargava said, “Fears of a collapse have been averted. But there are no signs of a recovery in the leading indicators of the sector.”

The slowdown and high food prices have combined to affect consumption. Private final consumption expenditure growth fell to 3.7 per cent in the first half, dropping a percentage from the growth rate a year ago. Private final consumption includes purchase of services, consumer durables and non-durables. “Clearly this is a sign that incomes pressures are on the rise, which does not augur well,” she said.

Will the government do something? Well, it sure is consuming more and more. Government final consumption expenditure includes all current expenditures for purchases of goods and services, including salaries to employees. It also includes most heads of expenditure on national defence and security, but not military expenditure.

Clearly the government has quickened the pace of spending (as defined above), which has grown by 8.85 per cent (six per cent earlier).

Does this mean a loosening of fiscal strings? It could simply be that a fiscal stimulus is quietly under operation to prevent a slip back into the historical Hindu rate of growth of the seventies.

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