Is the pace of economic growth slowing down? GDP registers slowest expansion in last 5 quarters

The Indian Economy experienced a slowdown in GDP growth as the economy grew at its slowest pace during 4th quarter in last 5 quarters. The last quarters’ growth was marred by the weakness in mining and factory output growth that remained below expectation. The slowdown can also be attributed to slow pace of investment, poor performance in manufacturing production and increase in fuel prices. The fall in investment and consumption was mainly because of increasing interest rate on RBI’s aggressive monetary policy stance.

According to Central Statistics Office (CSO), Ministry of Statistics and Programme Implementation, in the last quarter of 2010-11 financial year Indian economy grew by just 7.8% compared to 8.2% in the third quarter. Indian economy experienced growth of 8.5% in 2010-11, it was just below the government expectation’s 8.6% and up from 8% a year earlier. On the same time, the GDP growth numbers for the 1st and 3rd quarters of 2010-11 have been revised upward from 8.9% and 8.2% to 9.3% and 8.3% respectively.

The downturn revision in the GDP growth is mainly because of lower performance in Manufacturing sector (5.5% from 15.2% in the same quarter of 2009-10), mining and quarrying (1.7% from 8.9% in the same quarter of 2009-10) and trade, hotels and communication (9.3% from 13.7% in the same quarter of 2009-10). However, services including banking and insurance grew by 9% compared to 6.3% in the corresponding period last year. Farm output showed tremendous improvement, growing at 7.5% compared to a meager 1.1% in the same three-month period last year. The agriculture and allied sectors grew by 6.6% as against a meager 0.4% in the previous year. The growth of services, including banking and insurance, improved to 9.9% in 2010-11 from 9.2% in the previous fiscal.

This slowdown in the 4th Quarter GDP growth was expected and the figure of 7.8% GDP growth is lower than economists and analysts prediction of 8 to 8.2% GDP growth. This quarterly drop in the economic growth had increased the concerns for the future growth of the economy.  Recently most of the national and international organizations had downgraded India’s GDP forecast for 2011-12. However this drop had hidden indication for the future and alarming as well, as the Central Statistical Organisation (CSO) data indicated that growth drivers investments and consumer demand too have started waning. Government will have to adopt co-coordinative approach to deal with inflation and which is leading to economic slowdown in short term. Because the origin of inflation is high global commodity prices, beyond the control of government and even the aggressive stance of RBI is not helping much to curb the same.

As per the CSO estimate the gross fixed capital formation for the full year has come in Rs 16.9 lakh crore, experts are looking at this figure as disappointment from capital formation point of view. This figure is almost similar to CSO projection of 19.89 lakh crore. The capital formation in the economy has been slowing down. Last two quarters of previous fiscal year clearly showed that the investment activity was severely affected by the number of factors interest rate and inflation which is affecting consumption in the economy. This fall in consumption is also from private consumption. Last year private final consumption expenditure fell from Rs 7.5 lakh crore to 7.1 lakh crore but this year the falls seems to be a little sharp. It has fallen from Rs 8.2 lakh crore to Rs 7.7 lakh crore, Q-o-Q. This weak capital formation and low level of consumption we are started this new fiscal year and it is likely to the evident from coming IIP numbers.

The development is significant because it is the first quarter of sub-8% growth rate since the crisis. Last four quarters we have been growing above 8% so this is really a slow starting point for the next financial year. It won’t be a big thing if next two quarters we continue to see sub-8% growth, given weakness globally. Perhaps there will be some acceleration in the second half. Despite this slowdown in economic growth Indian economy is still the second fastest growth economy among major economies after China backed by the high domestic demand because of increase in income. However, Prime Minister Manmohan Singh had expressed the confidence that Indian economy would achieve 8.5% growth, helped by expectations of normal monsoon which is very vital for the economic growth.