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Growth defects

Third quarter GDP figures indicate that the downturn hasn’t bottomed out yet.


March 5, 2014 12:39:01 am

Third quarter GDP figures indicate that the downturn hasn’t bottomed out yet.

In spite of the optimistic HSBC Purchasing Managers’ Index (PMI) reading for February, hopes that the downturn has bottomed out have dimmed. The Q3 GDP figures, released by the Central Statistics Office last week, put the PMI in perspective. The PMI reflects order booking for a distinct sub-section of the economy — and may only translate into actual growth with a time lag — while the GDP figures mirror a broader reality. Not only was Q3 of 2013-14 the seventh consecutive quarter of below 5 per cent growth, but achieving the advance growth estimates also seems extremely unlikely now. The economy only grew 4.7 per cent overall, with the mining and manufacturing sectors contracting 1.6 and 1.9 per cent respectively.

In order to achieve the government’s projected growth rate of 4.9 per cent for 2013-14, the GDP would have to expand by 5.7 per cent in Q4, and agriculture would have to grow by over 8 per cent. Given that agriculture only expanded 3.6 per cent in Q3 — compared with 4.6 per cent in Q2 — in spite of a good monsoon, and the not-so-impressive October-December PMI, to achieve this will be a tall task. Interestingly, the GDP figures have thrown up an unlikely growth hero. If it wasn’t for the $34 billion that the RBI attracted through its FCNR deposit scheme, it is doubtful that the financing sector would have grown 12.5 per cent in Q3 — 2.5 percentage points over its Q2 growth. This sector’s expansion alone accounts for 0.48 percentage points of the headline growth figure.

Not only has the growth of private consumption collapsed — it has not crossed 3 per cent in the last three quarters, and was never lower than 4.7 per cent in the 12 quarters before that — but the growth of gross capital formation, or investment, a crucial symptom of an economy’s health, is also worrisome. Investment contracted 1.9 per cent in Q3 — a stark contrast to the double-digit investment growth of 2010-11. But if the government wants to get the investment cycle moving again, it will have to help banks and firms clean up their books, and make prospects more inviting for investors. While the Rs 6.6 lakh crore worth of projects that has been cleared by the Cabinet Committee on Investment is a good sign, in order to get these projects off the ground they may well have to be restructured in the changed, gloomy economic landscape.

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First published on: 05-03-2014 at 12:39:01 am
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