Q3 GDP at 6.1%; weakest pace of growth in almost 3 years

India's pace of economic growth slowed to its weakest annual pace in almost 3 years in the October-December quarter at 6.1%, as high interest rates and rising input costs constrained investment and manufacturing. Growth in GDP at factor cost during Q3, 2011-12, at 2004-05 prices, is estimated at 6.1% as compared to the growth rate of 8.3% in Q3, 2010-11. The growth rate is lesser than the widely expected number of around 6.3-6.4%.

The growth in GDP at factor cost during Q3, 2011-12, at 2004-05 prices, is estimated at 2.7% in ‘agriculture, forestry and fishing’ sector, 2.6% in industry and 8.9% in services sector, year-on-year. Growth in mining and quarrying is expected to decline to (-) 3.1% whereas manufacturing is estimated to grow at a dismal 0.4% during Q3, 2011-12 as compared to the same quarter last year. The numbers in manufacturing have come as quite a shocker given the recent IIP numbers. The electricity sector is estimated to grow at 9% during Q3, 2011-12.

The all important gross fixed capital formation (GFCF), an indicator of the level of investment in the economy, is expected to contract to (-) 1.2% at constant prices in Q3. Private final consumption expenditure (PFCE), the driver of growth, is expected to grow by 6.2%. The GDP estimates for the third quarter have come in as a disappointment.

Given these numbers, the estimated growth of 7.1% for FY’12, looks difficult. The growth for the period April- December 2011 has been revised to 6.9% and maintaining the same for the fiscal could also be a challenge given the drop in investments. As per economists, the growth numbers per say may not be a big concern as is the composition of this growth. With investments declining and consumption expenditures on the rise, the economy could face inflationary pressures in coming times.

Further, this could also limit the extent of measures that the Reserve Bank could take to stimulate growth. Growth in FY’13 too looks a little dismal with most believing that a rate of 7% will be achieved only by the second half of the fiscal. For the first half of FY’13, the growth rate is expected to be sub 7% unless the government takes some drastic steps in the upcoming Budget. Meanwhile, the Central Statistical Organization has pegged the GDP growth for 2011-12 at 6.9%, while the Prime Minister's Economic Advisory Council (PMEAC) expects that it would be 7.1%.

With the Indian economy slowing down to almost a rate which is close to the rates it saw post the Lehman Brothers crisis, all eyes are now on the government. Raising of capital expenditure, a decline in fiscal deficit, specific incentives for the infrastructure and a concrete plan for fiscal consolidation are some of the areas that need to be worked on to improve the sentiment of the economy. Economists are also of the opinion that a visionary budget with the government’s commitment to growth and fiscal consolidation in the coming years could help provide the necessary boost to the economy.