GDP For FY12 At 6.5 Per Cent, Tough Times Ahead

The gross domestic product (GDP) growth for the March 2012 quarter came in at 5.3 per cent, much below the street expectation of 6.1 per cent, and continued on its declining trend for eight consecutive quarters. As for the full year FY12, the GDP growth came in at 6.5 per cent as compared to 8.4 per cent growth as seen in FY11. The decline in growth by 190 basis points clearly indicates that Indian economy is facing serious headwinds and is moving on a slow growth track. Here we would like to take credit for having made the right forecast through our previous Mindshare article titled “March Industrial Output Falls To Negative 3.5 Per Cent’ in which we had stated that the GDP growth for FY12 would be around 6.5 per cent as against the government’s estimate of 6.9 per cent.

Now let us look at the respective industry growth numbers for the March quarter. Agriculture, forestry and the fishing industry grew by a meager 1.7 per cent versus 7.5 per cent growth in the same quarter last year. The manufacturing growth also contracted to negative 0.3 per cent as against 7.3 per cent growth last year. Community, personal and social services growth came in at 7.1 per cent as against 9.5 per cent last year while the mining & quarrying industry registered a growth of 4.3 per cent as against 0.6 per cent in the last quarter.

Just to reiterate, in the last fiscal year our economy faced a very tough environment. The euro debt crisis worsened with the US showing weak signs of recovery. Even the domestic environment was not good enough with the interest rate and inflation moving northwards for most part of the year. The RBI kept its hawkish stance while inflation hovered at around 9 to 10 per cent for the year. It seems that there is no respite for our economy. The broader market in FY12 (April 2011 to March 2012) also tanked by almost 10.5 per cent.

Going ahead, what should investors expect from the market and economy? Will FY13 also be very challenging? The answer is probably yes. Our economy still faces various major issues like sticky inflation, subdued growth, rupee depreciation, high current and fiscal account deficit as well as a policy-paralyzed government.

Inflation, which had shown signs of cooling in early 2012, has again started to move higher. With the wholesale price index (WPI) at 7.23 per cent and the consumer price index at 10.36 per cent for the month of April 2012, this has again put the common man in trouble. The index of industrial production (IIP) for the month of March 2012 contracted to negative 3.5 per cent, which further indicates that the IIP for the month of April would also come in at subdued levels. Further, the rupee which is showing no signs of stopping from its free fall has added more worries to the economy.

In May 2012 it depreciated by almost 7 per cent and is now trading at an all-time low of Rs 56.50 against the US dollar. This would further worsen our accounts and widen the current and fiscal account deficit. Adding to that, all the hopes and expectation from the government about taking reformist steps seem to be dashed to the ground. The government, in its Union Budget 2012, had estimated that the GDP growth for FY13 would be at around 7.6 per cent. However, the way things are currently moving, we would not be surprised if the economy contracts and the GDP growth of our economy comes in at around 6.5 to 7 per cent. All eyes would be on the Reserve Bank of India’s mid-quarter review of the monetary policy for 2012-13, which is scheduled for June 18, 2012.

It would be a very challenging task for the RBI to make the next move as the inflationary pressure continues to persist over the economy and it has become necessary to cut the rate to fuel growth. We at DSIJ believe that the RBI will not cut the rates in the next monetary meet as we think controlling inflation needs to be a priority issue rather than looking at the growth of our economy. Investors are advised to play with caution as the days ahead are going to be tough indeed.