Growth, Rupee and dollar incomes

Hit by global recession and costly credit, India’s economy may expand at its slowest pace in three years at just 6.9 per cent during the current financial year (till March 31, 2012) , compared to a more respectable 8.4 per cent in the previous fiscal.

Indians used to 8-9 per cent GDP growth and aspiring to see their economy grow at double digits, weren’t exactly happy with the news. Business leaders were quick to say “I told you so”, pinning blame on high interest costs for slowdown in investment and consumer demand. A tight money policy to combat commodity inflation has seen interest rates for buyers of homes and cars as well as industry hoping to set up new factories rising to 12-16 per cent compared to 8-12 per cent, two years back.

The government admitted slowing industrial growth was a problem but also blamed the   Eurozone crisis and continued slow recovery in the US and Japan, India’s major markets. A  quarter of India’s GDP is accounted for by foreign trade and this has obviously taken a hit.  

The problem for the Congress led government has been that if it does not give the Reserve Bank a free hand to combat inflation, it risks alienating millions of poor people who have voted it to power and whose very daily meals are at threat because of rising food prices.   

On the other hand. Slow growth, shut factories means millions remain unemployed. Not exactly good news for a party which wants to woo 18-25 age group voters.

The problem of course was industrial growth at a mere 3.9 per cent compared to 7.6 per cent last year and double digit growth for most of last decade. Industrialists have long been protesting that 13 rounds of increases in the Reserve Bank’s policy rates which now stands at a high of 8.5 per cent, has made it difficult for them to borrow to set up new plants and factories or to refinance old debt

India Inc.’s top brass including the likes of Wipro’s Azim Premji, truck-maker Keshub Mahindra and banker  Deepak Parekh had also written letters to Prime Minister Manmohan Singh blaming the government for a policy logjam which has seen several key policy initiatives including bringing in foreign investment in retail, pension funds and aviation delayed and mining sector held up by unclear environmental laws.

High interest rates slowed down sales of big ticket consumer items such as housing stock and cars. Auto sales halved from 30 per cent in 2010 to just over 14 per cent in 2011, while housing sales remained sluggish in 2011 and could be in negative figures in 2012 according to credit rating agency Fitch. The latest figures issued by the Central Statistical Organisation placed growth in construction at 4.8 per cent in 2011-12, against 8 per cent in 2010-11.

Mining output shrank by 2.2 per cent. Partly because of policy logjams which saw much of the area earmarked for coal mining declared `No Go’ where mining would not be allowed on environmental considerations and partly because of heavy Monsoon rains which saw many mines shut down in central and eastern India.

Farm output is expected to rise 2.5 per cent, compared with 7 per cent in the year before. However, this is seen as a statistical glitch given that last year farms recovered after a bad farm year in 2009-2010, when agriculture grew by just 0.4 per cent. Only services provided a silver lining. Trade, hotels, transport etc. grew 11.2 per cent while finance, insurance, etc. grew 9.1 per cent.

In its mid-year Economic Review, the government had pegged GDP growth at around 7.5 per cent and at  9 per cent in its pre-Budget survey released early last year. Worryingly, economists do not see much improvement next year despite hopes that the RBI will now relent and allow interest rates to drop in a bid to push growth.

Most economists expect the economy to grow next year by 7.5 per cent or so. Not great news but still music compared to negative or marginal GDP growth rates being posted by the west.

Postscript:

The latest data also showed that per capita income will be above Rs 60,972 per annum during the current fiscal. In terms of rupees this means incomes have gone up 14 per cent in a single year! Not bad at all despite inflation eating into earnings. However,  because the Rupee’s value has fallen it means in Dollar terms Indians on an average now earn $ 1240  a year instead of $ 1177 they used to in February last year, an increase of just over 5 % !