The grim state of economy, accentuated by a slowdown in the first half of the current financial year, may get still worse in coming months — as reflected in the investment situation in the first two quarters of 2011-12.
The gross fixed capital formation (GFCF), a proxy for investment rate, showed serious downtrend in growth for the second quarter. It stood at 7.06 per cent (year-on-year), which was 14 per cent in the first quarter.
As for the second quarter, too, GFCF saw a negative growth of 0.17 per cent sequentially. Economists partially blame the high interest rates for the slow investment rate. The rest of the blame goes to the loss in demand.
Madan Sabnavis, chief economist CARE ratings, says the decline in the investments is primarily due to two factors. “One, lower demand that followed low industrial growth; and, two, high interest rates that made borrowing costlier.”
However, he hinted at improvement in the future if the demand improves. “The demand could improve or could have improved due to the busy season in October,” Sabnavis notes. “We will have to wait for the IIP (index of industrial production) numbers to say anything for future scenario.”
However, Yes Bank chief economist Shubhada Rao cautions that there is an “extremely cautious” investor sentiment prevailing — and that the investment-led slowdown will linger longer.
As for PMEAC, its chairman C Rangarajan says, “What you are seeing in investment is reflecting in the overall GDP number.”
Chief statistician T C A Anant says the slow investment is due to the cyclical nature of the Indian economy.
“Private investment was large for some time; so it is natural to expect some slowdown,” he notes. The situation “will improve” in the next 3-6 months in private investments. “For the first time, we are seeing a cyclical recession,” he adds.
Sabnavis rejects the claim that the impact was also due to an uncertainty in the economic climate in the euro zone. “Our growth is domestic,” he notes. “Hence we cannot really say that there has been an impact of the euro zone crisis.”
