The Indian Economy has slowed to a six year low in Oct-Dec (Q3), and the the last time the US economy shrunk as much as it did in this quarter was way back in 1982. Not unexpectedly, India’s sharp dip has taken place with the investment-to-GDP numbers falling from 35.3% of GDP in Q2 2008-09 to 31% in Q3 — it was the sharp hike in this, buoyed largely by corporate India’s investment binge, that had led to the sharp surge in GDP over the past few years. How bad Q4 will be is anyone’s guess, but the Pay Commission hike caused a 17% y-o-y rise in output of the ‘community, social and personal services’ sub-sector, according to Macquarie Research’s analysis [of the 5.3% hike in Q3 GDP, the contribution of this sub-sector was 2.1 percentage points (ppt) as compared to a much lower 1.1ppt in the Q2 GDP growth of 7.6%]. At the micro-level, as the CII-Boston Consulting Group (BCG) Crisis Monitor shows, things are worsening with each passing week — most sales and profit growth figures show a downward trend.
The government’s response, of a sharp hike in the deficit, especially in 2009-10 when oil/fertiliser/food subsidies will sharply contract, has been criticised by the markets on the grounds it will hike interest rates. This is only partially true. For one, if government spending substitutes poor private spending, interest rates won’t rise. Second, once you put in repo rates into the equation, these have a greater impact on lowering GSec rates — in other words, despite the higher deficit and borrowings, the government still has a lot of headroom for lowering interest rates by cutting the repo rate. That’s good news.