India?s GDP grew at an unbelievably low 5.3% y-o-y in the three months to March 2012. If that?s not shocking enough, if the data is reliable, net of foreign trade, GDP may have actually grown just about 1.5%.
The data showed a trade surplus of $10 billion; there was a faster rise in exports of 18.1% y-o-y, coupled with a significantly slower increase in imports of a mere 2% y-o-y. That left the net exports accounting for almost 4% of the GDP growth.
While some amount of caution against discrepancies in the data is warranted, Sujan Hajra, chief economist at Anand Rathi points out that this would reflect in the BoP numbers, expected at the end of June, as a current account surplus of a minimum of $20 billion. The pertinent point is that while the 5.3 % number in itself is ominous, the growth might actually be worse.
As Leif Eskesen, chief economist at HSBC says the slowdown in growth has proven deeper than expected and is the result of the lagged effects of monetary policy tightening as also the impact of the weak global economic conditions.
Eskesen adds that the ?curious net export boost in Q1? provided, at least, some temporary relief. Also there has been some sequential momentum. But, otherwise, GDP numbers are worrying because after the complete collapse in investments, the consumption piece too is slowing; that?s seen in moderation in retail and wholesale trade on the supply side. Indeed, the entire services space has lost momentum with the growth coming in at just 7.9% y-o-y, which is a big blow because for more than five years now, services have clocked 10% on average.
From a demand perspective, there?s been a deceleration in private and government consumption; while private consumption was up 6.1% y-o-y compared with 6.4% in the March 2011 quarter, government consumption came in at 4.1% y-o-y versus a better 4.7% y-o-y.
It?s possible real wages aren?t rising that fast any more. To some extent, consuming less will help arrest the runaway rise in prices and should the price of crude oil come down to levels of $100 or so, it would help ease inflationary pressures. However, inflation can?t be tamed unless the supply side is addressed; moreover the weaker rupee is also adding to imported inflation. In fact inflation estimates for 2012-13 are now pegged at around 7.3-7.4% and that takes into account a normal monsoon.
The consumer price index remains high and food prices continue to rise. So, while the stock market may have regained its composure by the end of the session on Thursday, and bond yields may have come off to 8.4%, believing the Reserve Bank of India (RBI) has been painted into a corner, it?s not going to be easy for the central bank to prune policy rates beyond a point. And even if the RBI does decide that money needs to become cheaper for growth to get a boost, that?s not going to mean a flurry of projects tomorrow.
There has been a slight pick-up in investments at 3.6% in the March 2012 quarter, but doesn?t mean too much since it comes off a big base effect?investments contracted 0.3% in Q42011.
Companies are clearly in no hurry to add to capacity until the government put in place clear policy guidelines and sorts out supply-side issues for key resources like coal and iron ore. As of now, therefore, it?s possible the first half of 2012-13 could see more of sub-6% growth. And perhaps the full year too.