Although an above-consensus GDP growth of 4.8% in September quarter has cheered everyone, the data reflects the growing severity of the impact of procyclical policies. The sharp deceleration in the services segment, more than half the production base, is much from fiscal contraction that is compounding the absence of industrial impulse and consumer demand. Another chunk of the economy, manufacturing, grew just 1%—the pathetic recovery is in no mean measure from high interest costs in a low-demand environment, notwithstanding the exchange rate stimulus. So even while growth forecasts are raised following this upturn, the gathering force of contractionary policies will serve to pull down the momentum. Anticipating this spreading weakness—fiscal screws will be tightened more to maintain budget boundaries—it is critical to reappraise the current macroeconomic policy framework. This is the time to signal monetary easing.
GDP data for the quarter just concluded showed manufacturing splutter back to life; but it only inched up 1% from a 1.2% contraction last quarter, and a depressing 0.1% last year. Net exports contributed 4 percentage points to the 5.6% growth in GDP at market prices. Private consumer spending grew 2.2%, half the rate clocked in the same period last year, and one-fourth that in 2011-12, indicating the secular decline in two-thirds of aggregate demand. Agriculture growth, at 4.6% year-on-year, did little to boost private consumption that added just 1.3 points to GDP.
Services’ growth slowed to 5.7%, from 6.2% the previous quarter and 1.4 points below last year’s corresponding quarter. Much of this deceleration came from fiscal austerity measures; growth in the “community, social and personal services” category sharply slowed to 4.2% from April-June’s 9.4%. This isn’t all. Growth in the “trade, hotels, transport and communication” category was static vis-à-vis the past quarter and 3 percentage points below last year’s growth, reflecting that consumer demand continues to weaken.
Higher frequency data shows that the deceleration in services continued into the current quarter too. The HSBC’s Purchasing Managers’ Index (PMI) for November showed a contraction for five consecutive months as services’ index remained below 50, the threshold separating expansion and contraction. Apart from post and telecommunications, all