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BW Businessworld

Slow And Unsteady

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The verdict is finally in, and it is not too good: India's economic growth in the fourth quarter of 2010-11 (FY11), as measured by GDP (gross domestic product), was somewhat lower than hoped for, and definitely less than what official estimates pegged it at. Of course, government officials had started talking down expectations before the final numbers came out: 7.8 per cent over the fourth quarter of FY10, rather than over 8 per cent.

It seems that finally, the slowdown is here, and the weak data shows it too. Industrial growth was lower because mining stalled, and on the expenditure side of the balance sheet, investment or gross capital formation was an extremely anaemic 0.4 per cent in the fourth quarter of FY11. Consumption also slowed, if one looks at the personal consumption expenditure (PCE) data.

Though the overall numbers suggest some small buoyancy — the GDP growth for the year as a whole was 8.5 per cent, just a tad below the 8.6 per cent estimate, but a review of the performance over four quarters shows a definite slowdown in economic growth for the year.

But that is not the scary part; it is the prospects for FY12 that look gloomy. Think of it this way. On the global level, most look at India's favourability as an investment destination as a risk on/risk off proposition, meaning when risk appetite is good, investment in India looks attractive to both domestic and foreign players. When investors become risk averse — as it is now — interest in the India story falters.

Given the concerns over European economies' debt problems, and lower than expected growth in the US, there is a heightened chance of capital flowing out of the country. Even Indian companies may choose to look at foreign acquisitions rather than invest at home; anecdotal evidence appears to suggest that many are.

A slew of corruption scandals, policy uncertainty and overzealous regulators have combined to lower capital investment; since investment played a large part in India's rapid growth in the past five years, any slowing down in investment has a ripple effect that lowers growth beyond the contribution of investment. Worse, restoring an increasing growth rate tends to be slower than its decline.

Exports have played a big role in buffering the slowdown in other areas of the economy such as manufacturing; the data about the current global environment suggest that export growth is also likely to slow, taking away that buffer. Lower global activity has one positive: lower commodity prices, and by extension, a dampening effect on inflation, which many see as a welcome sign.

But growth would put commodity prices back up, and mess up the inflation dynamic, leading the Reserve Bank of India (RBI) to continue its hawkish position, and even perhaps tighten monetary policy further. As many analysts have noted, inflation has not been a monetary phenomenon, but a supply-driven one, where the dynamics are less manageable through monetary policy.

Agriculture has been a positive surprise in FY11; thanks in part to a very good monsoon (though in some instances, excessive rainfall damaged a few crops), it grew at over 5 per cent. But both officialdom and private sector economists agreed that in FY12, agricultural growth would return to its historical trend of 2 per cent. That does not bode very well for food inflation in FY12.

Besides, the monsoon, while important, is no longer the critical factor in agricultural performance it was, thanks to better irrigation and technology. Official forecasts of the monsoon both in spread and intensity have often been wrong; the forecast is currently neutral, but expect the El Nina and El Nino effects to play a part this year.

So, what does it all mean? By themselves, all these factors may not have a great impact. Under current global conditions, they could exaggerate the downside more than they should. The troubled European economies may be more intransigent and could well drive Europe into a bigger recession. Sometimes, globalisation does not work for you.