India languishes

Tags: News
THE continuing weak investment environment and a slump in manufacturing pulled down India’s gross domestic product (GDP) growth to 5.3 per cent in the second quarter of this financial year.

The weak GDP growth signalled that a recovery was still way off, and this year’s budget target of 8.5 per cent GDP growth was unlikely to be achieved. The manufacturing sector grew just 0.8 per cent, down sharply from 2.9 per cent in the corresponding period of last year. Farm sector output eased to 1.2 per cent, thanks to deficient monsoon rainfall. During the corresponding period of last year, manufacturing grew 2.9 per cent. Growth in electricity, gas and water supply sectors also decelerated to 3.4 per cent, down sharply from 9.8 per cent during the corresponding period of last year.

Finance minister P Chidambaram said the growth was below expectations. “The weak growth was on account of weak showing by the manufacturing sector. Weak manufacturing growth pulled down the share of manufacturing in GDP to 15 per cent from 15.5 per cent in the corresponding period of last year,” he said.

The growth would have been still lower, but for the support from the construction and mining sectors. Construction activity grew 6.7 per cent, up slightly from 6.3 per cent during the year-ago period. Mining activity grew 1.9 per cent, after contracting 5.4 per cent in the year-ago quarter. The growth in the mining sector was largely on account of last year’s base effect and it showed a small recovery after the contraction.

The services sector also faced a slowdown. Growth in trade, hospitality, communication and transport sector slowed down to 5.5 per cent from 9.5 per cent during the corresponding period of last year. However, community services, social and personal services grew 7.5 per cent, up from the previous year’s 6.1 per cent, signalling an increase in government expenditure.

Espirito Santos Securities economist, Deepali Bhargava, said, “While there are no sign of a sharp recovery in the leading indicators of the sector, growth does seem to be stabilising at these levels.”

On the expenditure side, slow investments and weak consumption remained main causes of concern. Growth in gross fixed capital formation (2004-05 prices), which is an indicator of investment in the country, slowed to 4.06 per cent from 5.02 per cent last year. BNP Paribas Asia chief economist, Richard Iley, said: “Fixed investment continues to undershoot overall GDP growth. Kickstarting the investment cycle remains key to reviving growth.”

But at current prices the share of the capital formation improved slightly to 33.8 per cent from 32.8 per cent in the year-ago period. Angel Broking’s economist Bhupali Gursale said: “There appears to be a turnaround, but it could come with a lag.” The lag could mean that a recovery would take anywhere between 18 months to 36 months.

Growth in private final consumption expenditure growth, which is a leading indicator of consumption, fell to 3.7 per cent from 4.6 per cent. The weakening growth in private consumption was also partly fallout of high food inflation that has cut into disposable income of households.

HDFC Securities economic research analyst Sameer Narang said: “India remains in the midst of twin slowdowns. Government action and low interest rates can only help revive the economy.”

Exports that contribute to 25 per cent to the GDP slowed to 4.25 per cent, down 19.7 per cent from the corresponding quarter of the previous year. Iley said, “India is not immune to the sluggish global growth, particularly the euro zone, which is in recession.”

On the flip side, sagging growth in expenditure contributed to slowing the GDP deflator, a broad measure of inflation that includes the services sector. The deflator was down slightly to 7.34 per cent from 8.42 per cent in the second quarter of the last financial year. This, combined with October core inflation of 5.2 per cent, raises expectations of easing by the RBI, few economists said.

ICRA economist Aditi Nayar said, “The likelihood of a policy rate cut in December 2012 is low at present, given the guidance provided by RBI in October, 2012, and the anticipated pickup in WPI inflation in November 2012.”

Post new comment

E-mail ID will not be published
This question is for testing whether you are a human visitor and to prevent automated spam submissions.


  • Mutual fund stakeholders should focus on better returns in a bullish market

    The association of mutual fund of India (AMFI) has recently capped the commission paid to distributors of mutual fund schemes to a maximum of 1 per ce


Stay informed on our latest news!


Sarthak Raychaudhuri

vice-president, HR, Asia South Whirlpool of India

GV Nageswara Rao

MD & CEO, IDBI Federal Life

Timothy Moe

Goldman Sachs

Today's Columns

Roopen Roy

What we can learn from Singapore

Lee Kuan Yew passed away at the age of 91 ...

Rajgopal Nidamboor

Don’t depend too much on ‘heroes’

We all have our own set of ‘heroes’ — not ...

Shona Adhikari

Anjolie Ela Menon, the storyteller, is back

Anjolie Ela Menon, one of India’s most celebrated artists, is ...


William D. Green

Chairman & CEO, Accenture