GDP growth – slip not a fall

For once, the easing of GDP growth to 7.7 per cent (at constant prices) for the June quarter (Q1FY12) over 8.8 per cent a year ago may not be bad news, coming as it does after painstaking rounds of monetary tightening.

Several lead indicators, whether it is the domestic non-food credit off-take or the economic activity, as pointed by the OECD Composite Leading Indicators for India, are all pointing at a slowdown.

This said, the initial dip in growth momentum appears to be a slip, rather than a fall. The still robust services sector growth as well as export growth and a surprise rebound in investment growth, if sustained, could still sufficiently buttress economic growth, though an acceleration is unlikely.

On the other hand, the not-so-bountiful agri-output, even as it slows economic growth, may not help fight inflation. It may, therefore, be early days to say that the slowdown would automatically check inflation. Global factors remaining the same, this could mean that the RBI's rate tightening job is not done yet.

On anticipated lines

The June quarter GDP growth was on predictable lines on a number of counts. On the supply side, for instance, manufacturing growth at 7.2 per cent in the June 2011 quarter as against 10.6 per cent a year ago, does not come as a surprise. This trend is not only in line with the IIP numbers, but also reflects the capacity constraint now prevalent in a number of sectors.

Besides, lower production of commodities such as steel, cement as well as automobile sales corroborate the lower manufacturing activity.

This dip in manufacturing growth also comes on the back of IIP adopting 2004-05 as a base year and a marginally lower weight to manufacturing, even as more relevant items were brought under the manufacturing basket. The current numbers therefore make for a more relevant picture.

The dip in the mining sector to 1.8 per cent too, is not surprising, given the lingering regulatory and land-related issues in the sector.

Mining sector incidentally, has seen a marginal increase in its weight in IIP. The sharp dip in construction activity too, although most worrisome, was not unanticipated, as the execution of projects — be it roads or power — have seen a slowdown, as reflected in revenues of infrastructure developers.

If the current performance of the mining and construction sectors continues, they can drag down the performance of the manufacturing sector over the long term, after the impact of monetary tightening plays out.

Services save the day

Even as the industry segment slowed, the services sector, spearheaded by trade, transport, hotels and communications, have kept the GDP growth from collapsing. Freight volumes, passenger traffic as well as new mobile connections, despite showing signs of slight moderation, have nevertheless been healthy.

With a 58.4 per cent share in GDP, the services sector as a whole expanded in double-digits, despite a high base, backing overall GDP growth. However, emerging signs of a gentle slowdown in credit growth (latest data shows a dip in credit growth to 18.9 per cent in July 2011 from 20 per cent in July 2010), which would impact banking and financial services segment, may be necessary to slacken the pace of services growth.

Investments sustainable?

On the expenditure side, the moderation in private final consumption expenditure to 6.3 per cent from 9.5 per cent a year ago was partly due to high base.

However, telltale signs of slowdown in consumer demand, especially in the sale of consumer non-durables, same-store sales in the case of retailers and slower vehicle sales, all point to the lag effect of interest rate tightening beginning to take effect in the hands of consumers.

The more interesting aspect on the spending side though, is the improvement in gross fixed capital formation or investments to 7.9 per cent in the June quarter as against a poor 0.4 per cent in the March quarter. This is also substantiated by an increase in imports, suggesting investment activity in the country.

The sustainability of this trend of improving investment activity, given the current high interest rate scenario, remains in doubt.

However, if it does, it could well debottleneck the capacity constraints in some of the sectors but only after demand itself slows.

Another segment to remain on a strong wicket was exports. Even as it slowed marginally to 24.3 per cent in June from 25 per cent in the March quarter; exports in July, up by a whopping 83 per cent, if sustained, could hold enough steam to support GDP.

Such a surge, would however, not help the demand-pull inflationary scenario.

Another segment of GDP — agriculture — too poses a threat to the final mission of containing inflation. At 3.9 per cent growth, agriculture output is slowest in the last four quarters.

While agri growth has never been too high to speak of, the sedate growth after a successful season of rabi crops such as rice and wheat, provides concerns about food prices.

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