Investment Shastra

Why has India’s GDP growth slowed down?

The Gross Domestic Product (GDP) in India expanded 7.7 percent in the second quarter of 2011 over the previous quarter – the slowest growth rate in six quarters. Rating agencies like CRISIL as well as the IMF have revised down their GDP forecast for 2012 to 7.6% and 7.5% respectively. So, what’s the cause of this slowdown?

This has primarily been attributed to rising interest rates, high inflation and global unpredictability, created specifically by the economic woes of the developed world.  Even as the Gross Domestic Product (GDP) of Asia’s second largest economy continues to hover below 8% for the second consecutive quarter, inflation and interest rates continue to rise. In fact The Reserve Bank of India (RBI) has raised rates a dozen times since March 2010, thereby making it amply clear that controlling prices remains its priority. In order to control inflation, the RBI is compelled to hike interest rates, and although this is damage control, it creates its own ripple effect to the detriment of the economy.

High interest rates mean that fresh investments in the infrastructure sector are then restricted. This in itself has caused an overall slowdown in the industrial and service sectors (the largest components of GDP), which need good infrastructure to thrive. Raising interest rates in a bid to control inflation may not however be the only answer. To ensure that industry grows fast, it is good infrastructure that is a must.

There is no simple answer to the recovering of an economy from a slowdown. Every cause has an effect and so it is with the economy. Rising prices means that demand decreases; when demand decreases so does an industry’s margins. As if this were not enough, there is the added burden of increased government interest rates. All this naturally affects the revenue of a company/industry and its position in the stock market (or stock value) becomes less lucrative. The cause (inflation/increased rates/lower GDP) results in the effect (fall in stock value/markets).

The need of the hour is a swift approval of legislation and projects that could help dissolve the bottlenecks in the economy. For a government seemingly preoccupied with the disentangling of a series of corruption scandals of the past months few months, this effect ought to now become a priority.

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Disclaimer: This publication has been prepared solely for information purpose and does not constitute a solicitation to any person to buy or sell a security. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations or needs of an individual client or a corporate/s or any entity/ies. The person should use his/her own judgment while taking investment decisions.

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