India’s Q3 GDP growth slows down to lowest level in last two years

After witnessing a decline in GDP growth to 6.9% during the second quarter it was expected that the third quarter too will remain somewhat in the similar lines with consensus expecting economy to grow at 6.4%. However the numbers have come below the expectations.

The sluggish macroeconomic environment, high interest rate regime by RBI has led India’s GDP growth rate to slip further to 6.1 per cent in the third quarter of the fiscal vs that of 8.3% in corresponding quarter previous year (7.7 per cent in Q1). This is the slowest pace at which GDP has grown in last two years. In 9MFY12, GDP has grown at a rate of 6.9 per cent vs 8.1 per cent 9MFY11. Earlier the central Statistic office (CSO) in its estimate pegged the GDP growth rate 6.9 percent for the fiscal year 2012. While RBI in its monetary policy has pegged the GDP growth rate at 7%.

Core sector growth, contributing 38 per cent to the IIP numbers grew by merely 0.5 per cent in month of Jan 2012 compared to the upwardly revised 4.6 per cent for month earlier. While sectors like electricity, fertilizer and coal production showed an expansion in the month of Jan, others like steel, crude oil, natural gas and refinery products contracted.

The Economy in last one year has been struggling with various events such as high inflation that forced the RBI to squeeze out the liquidity from the system, Weak European region, and a lack of strong policy reforms for major sectors like Power Mining etc. Moreover the burgeoning fiscal deficit on account of the subsidy bills and welfare programs has not provided much room on the government expenditure side too.    

The dismal and sluggish performance for the third quarter has been mainly on account of negative performance by the mining and quarrying sector coupled with a slowdown in manufacturing and agriculture sector. Mining industry is facing a slowdown as a result of a ban on iron ore mining leading to an overall fall in output. Manufacturing, which accounts for approximately 15% of India's GDP, was likely to be the biggest drag even as farming and services provided some support to the economy.

While manufacturing sector which accounts for approximately 15% of the India’s GDP has been a major drag for the overall GDP growth 0.4% .as compare to that of 7.8% in the same period last year. The lower output from the sector was largely on account of the high input prices and high borrowing cost which impacted the investment cycle and the output from the manufacturing industry.

However the electricity sector followed by construction and BFSI sector managed to pull in some growth and restrict any further contraction in the overall GDP numbers. In fact construction sector rebound with growth of 7.2% vs the previous quarter of 4.3%.

The policy measure taken by RBI in the past to curb inflation has impacted the growth in the economy and now it seems that this is the right time for the governments to kick start economy with new policy reforms and measures. This also means now RBI may look for cut its key policy rate to stimulate the economy. And all eyes are on the RBI and its monetary policy stance to be announced on 15th March 2012which will be before the budget announcement.

A slowdown in economic activity plus cooling inflation numbers, could force the central bank to take some step in terms of its key policy rates. One must also closely watch the inflation internals for this week as the numbers may provide more cues into RBI’s possible policy action.

In conclusion, we at Dalal Street Investment Journal,  advice our readers to stay cautious and closely follow the central bank's policy stance. The markets are currently under pressure from high interest rates which has dented the investment cycle in the economy. Also rising oil prices can become one of the concerns for the RBI in the coming months. Moreover burgeoning fiscal deficit due to a huge subsidy bills government does not stand in strong position to announce major stimulus measures.