Economic growth slumps to 4-year low; Manmohan says he is still hopeful
Economic growth slumped to its slowest in four years, clocking just 4.4 per cent in the April-June quarter compared with 4.8 per cent in the January-March quarter, dashing hopes that the GDP growth slowdown had bottomed out.
The new fall was precipitated by a sharp contraction in growth in both manufacturing and mining. It comes at a time when the stock market has dropped more than 10 per cent in the past three months and the rupee has lost a sixth of its value against the dollar this year, much of it in the past month.
Speaking before the data was released on Friday, Prime Minister Manmohan Singh asserted that he was still hopeful the country would grow at 5.5 per cent in 2013-14, rejecting projections that growth may slide below 4 per cent this year.
“We have the will power to pull back the economy to 8 per cent growth rate,” he said in Parliament. Singh’s projection is sharply lower than the budget estimate of 6.1 per cent to 6.7 per cent GDP growth announced just six months back.
But all the worrying signs of the cascading impact of the slowdown were evident in the latest set of numbers released by the Central Statistics Office (CSO). These include a decline in passengers kilometres recorded by the railways, down 3.4 per cent in the April-June quarter, which points to signs of consumers cutting back on optional expenditure on travel.
The slowdown in the core sectors seems to have spread to the services sector as well, which had continued to hold up so far. Within the services sectors, only the ‘community, social and personal services’ – essentially representing government expenditure – grew faster in the first quarter at 9.4 per cent compared with 8.9 per cent during the same quarter a year ago.
While the ‘trade and the hotel’ sector grew at 3.9 per cent, the ‘financing, insurance and business services’ grew at 8.9 per cent during the first quarter, both lower than the rate of growth in the corresponding period a year ago.
This is the second straight quarter when the economy grew below 5 per cent after posting a 4.8 per cent growth in the January-March quarter of 2012-13. In comparison, it grew at a relatively more robust 5.4 per cent in the first quarter of the last fiscal.
The weak growth data further adds to the mounting concerns over the Indian economy that is plagued by the problems of a falling rupee, a widening current account deficit and a high fiscal deficit. Markets are expected to react to the data on Monday as the government chose to release the GDP figures late Friday evening.
However, the government asserted it is confident of an uptick in growth in the latter half of the fiscal on the back of measures taken over the last few months. “We were aware that the growth rate has been slowing down. We never felt that in the first quarter there was much sign of an improvement…it is in the second half of the year that we might see an improvement,” said Planning Commission Deputy Chairman Montek Singh Ahluwalia.
Arvind Mayaram, secretary, department of economic affairs added that “growth in the second quarter will improve and growth in the third and fourth quarters would be better”.
Raising further concerns over the government’s deteriorating finances, the Centre’s fiscal deficit in the first four months of 2013-14 touched nearly 63 per cent of its full year target while its revenue deficit was even higher at 73 per cent of the budget estimate.
Unconvinced by the government’s promises to set its house in order, private analysts have begun to trim their full year growth forecasts as well. Standard Chartered Friday lowered India’s growth forecast for the current financial year to 4.7 per cent from earlier 5.5 per cent, citing “upside risks” to inflation and the fiscal deficit.
But the data points to a more disturbing trend of structural factors stalling growth. “In real terms, gross fixed capital formation in the first quarter is negative. Basically, investment cycle will not re-start through just interest rate cuts or fiscal measures until structural problems are resolved,” said N R Bhanumurthy, an economist at NIPFP, adding that the growth in exports are the only silver lining.
Gross fixed capital formation dipped by 1.81 per cent in the quarter as against a dip of 2.23 per cent in the same period a year ago.
Meanwhile, demand too remained subdued with private final consumption expenditure growing by a mere 1.61 per cent in the first quarter and government final consumption expenditure rising by 10.4 per cent.
“We do not wish to sound alarmist, as there are enough panic reactions visible around us, particularly on the rupee, but the concern on the economy can hardly be overstated. The economy needs undivided attention of policy makers” said Chandrajit Banerjee, Director General, CII.
Among sectors, the sharpest growth in the April-June quarter year-on-year was in `financing, insurance, real estate and business services’ at 8.9 per cent and `community, social and personal services’ at 9.4 per cent.
However, mining contracted by 2.8 per cent in the April-June quarter against a 0.4 per cent growth in the same period of the last fiscal while the manufacturing sector declined by 1.2 per cent as against a contraction of 1 per cent in output a year earlier.
Construction, which now accounts for 8 per cent of the total GDP and had held up the growth rate in earlier quarters, has also collapsed to a 2.8 per cent rate of growth.
But the farm sector, which grew by 2.7 per cent in the April-June quarter, is expected to help boost growth in the coming months on the back of a good monsoon.