The writing is on the wall. GDP at 6.9% y-o-y, in the three months to September, means the economy will probably grow at just about 7% this year since there are no signs yet that the decelerating trend will reverse soon. The services sector has held up well to grow at 9.6% but the industrial sector clocked an anaemic 3.2% y-o-y growth as a result of very poor manufacturing output of just 2.7%. If problems relating to both coal and iron ore persist, the mining space will continue to contract.
Indeed the government had better focus on policy issues in the infrastructure space because the data reminds us, once again, that capital expenditure isn?t moving up. Rohini Malkani of Citgroup points out gross fixed capital formation at -0.6% has contracted for the first time since 2008-09 and at R4.02 lakh crore, it is virtually where it was in the June 2011 quarter. Companies have been reluctant to put out money over the last six months: that was already evident from the fall in Larsen and Toubro?s (L&T) orders of 21% y-o-y in the September quarter, which left the engineering major with little choice but to tone down the order inflow guidance for this year to just 5% from the earlier 15%.
Project starts in the September quarter were also at the lowest levels in nine quarters. Since the government is not really speeding up reforms or handing out clearances more quickly and, moreover, since interest rates are expected to remain high for at least another four to five months, companies are unlikely to move on new projects. Moreover, given that the larger economies in the western world could slip into a recession and also China?s economy may slow down, they will hunker down further. Indeed, the outperforming exports sector could see a tapering off. The other bright spot, private consumption, is beginning to fade; at a tad below 6% y-o-y it?s way below the 6.3% seen in the previous quarter.
Clearly, the lagged impact of high interest rates is now beginning to be felt and the Reserve Bank of India(RBI)?s tight monetary policy is working. The markets, for their part, seem to believe that slowing growth might compel RBI to worry less about inflation. But that may not be so because supply side bottlenecks aren?t really being taken off and also because the sharp depreciation of the rupee by 14% this year means imports will cost more; for the next few months, inflation will come off because of the base effect.
Also, despite the slowdown globally prices of key commodities don?t seem to coming off; crude oil prices remain at over $100 a barrel. As such, it will be difficult for the RBI to ignore inflation and if the markets are expecting interest rates to start coming down in the next few months, they could be disappointed. In terms of signalling a change in the policy stance, it?s unlikely the RBI will act before April next year. Unlike China, where reserve ratios have been trimmed by 50 bps, RBI may not have the leeway to do so given the high fiscal deficit. It?s unfortunate the government doesn?t seem to realise the implications of the economy growing at sub 7% in 2012-13.