It?s true that interest rates have seen a sharp rise, especially at the shorter end, and that lending rates are up about 100-150 basis points since August last year. But that?s not the reason why investments aren?t picking up ? investments in the March 2011 quarter were virtually flat at 0.4% year-on-year (y-o-y) pulling down the GDP to a less-than-expected 7.8%.
So from nearly 15% y-o-y growth in the first half, investments have virtually collapsed in the second half. The reality is that companies simply don?t have the confidence to go ahead with their expansion plans in a tough macroeconomic environment and in an uncertain and lethargic regulatory environment.
It doesn?t help that Japan?s economy is contracting, China?s economy is reeling under power cuts and that sovereign debt problems have resurfaced in the Eurozone. Goldman Sachs has lowered its US growth forecast for a second time in a month to 3% for the June quarter warning that they see a downside to this estimate too. So the government needs to move quickly making sure the numerous bills waiting to be turned into Acts are pushed through as also the clearances for projects.
Within the industrial sector, growth in manufacturing output in the March 2011 quarter, slowed down to a high base effect but held up well on a sequential basis as reflected in the PMI and IIP readings. As HSBC points out, what?s also helping is the buoyancy in services ? trade, transport, hotels and communications ? which turned in a 9.3% y-o-y growth compared with 8.6% y-o-y in the December 2010 quarter. What?s worrying is that banking, insurance and real estate have seen a slight deceleration possibly the effect of rate tightening.
While higher interest rates may not have impacted consumer spends too significantly so far it?s possible that further increases could do so. Anecdotal evidence suggests that car sales are slowing down though that would be more on account of rising fuel prices while in the case of home purchases, it would be the price of the asset that?s intimidating.
So far private consumption is doing fairly well though it eased a bit in the March quarter to 8% y-o-y from 8.6% y-o-y in the three months to December spurred by an increase in real wages. The star performer continues to be exports which rose 25% in the March quarter and should global growth pick up velocity in the second half of the year, when the reconstruction in Japan gets going, they should continue to help cushion the high import bill.
If the markets shrugged off the somewhat disappointing GDP numbers ? the rally on Tuesday was a resounding one with the Sensex up 271 points closing above the 18,500 mark ? it was because the GDP growth in the March 2010 quarter was a very high 9.4%.
Also, if one looked at the numbers sequentially the momentum seems to have been maintained. But growth will clearly slow down as interest rates rise further in response to continuing high inflation. The good news is that the monsoon seems to be on time and now all we need is for it to rain evenly across the country; that would keep rural incomes high. But that?s not enough. For growth to sustain at 8% investments need to kick in.