The estimates of India’s gross domestic product (GDP) for the third quarter (Q3), which ended in December 2011, were released by the Central Statistics Office yesterday. They should leave nobody in doubt about the trajectory of the economy’s growth in the current financial year. At 6.1 per cent, not only has the growth rate been the lowest in any quarter since 2009, but it also confirms a steady deceleration over the last year; each succeeding quarter has clocked a lower growth rate than that in the previous one. The Q3 GDP numbers are a dampener for another reason. The advance estimates for the annual growth rate for 2011-12, earlier pegged at 6.9 per cent compared to 8.4 per cent in the previous year, may now appear over-optimistic, and the 7.1 per cent projection made by the Prime Minister’s Economic Advisory Council even more unrealistic.
More worrying symptoms of a deteriorating state of the economy are visible once the sectoral breakdown of the GDP numbers is analysed. The manufacturing sector continues to present a dismal picture, with less than half a percentage point’s worth of growth recorded in the third quarter, compared to 7.8 per cent in the same quarter in 2010-11. The steady decline in the sector’s performance in the earlier quarters of the current financial year, estimated at 7.2 per cent and 2.7 per cent in Q1 and Q2, respectively, is a cause for concern — not least because there doesn’t seem to be any hope of a recovery in the near future. This can be inferred from the fact that there has been no pick-up in the investment rate. Gross fixed capital formation as a percentage of GDP has steadily declined in the first two quarters in the current year, and is now at 30 per cent in the third quarter, compared to 32.3 per cent in the same period last year. The continued contraction in mining for the second successive quarter – by over three per cent in Q3 – only shows how costly the government’s neglect of this crucial sector has been. Worse, the latest quarterly numbers show signs of a marked deceleration in the growth of the services sector. This sector had, until now, held up, bolstering the overall GDP numbers.
A variety of factors can be held responsible for the deceleration. Increasing global uncertainty in the wake of the euro zone crisis and weaker external demand have certainly played an important role in the country’s lower growth. But no less significant a factor in causing the slide is the government’s policy stasis, as well as the Reserve Bank of India’s (RBI’s) reluctance to take early remedial steps with appropriate monetary policy interventions. Both these failures have also led to a significant decline in business confidence. Whatever the RBI has done in the past has proved to be too little, too late. The Q3 GDP numbers are a timely warning for the government and the central bank; both have an opportunity to make amends through the monetary policy review on March 15 and the Budget a day later.