The Elephant slows down

The charge of India’s bull elephant economy slowed down to a 2-year weakest of 6.9 per cent in the second quarter of this financial year.
A long year of what many critics described as policy paralysis and rising interest rates weighted down the $1.73 trillion economy’s growth with manufacturing growing by as little as 2.7 per cent after growing by 8.2 per cent in the same period last year. A falling Indian rupee trading at Rs 52.16 to the dollar,  down by 18 per cent since August 1 this year, has also not helped bolster industry’s confidence. Fuel, machinery and spares imported by paying dollars, now need more rupees to purchase.
For almost a year, industry captains had been arguing vehemently that high interest rates were killing consumer demand and combined with a policy paralysis in government reducing India Inc.’s appetite for investment and that this would ultimately slowdown the economy.
Interest rates have been tweaked upwards some 14 times since  March 2010 by the Reserve Bank of India in a bid to batter down rising prices.  High food and fuel prices had seen headline inflation at near double digits for most weeks of this year, forcing the country’s central banker – Reserve Bank of India – to hike the rate at which it lends to banks to 8.5 per cent. This in turn translated to actual lending rates to consumers and businesses of between 12-18 per cent. 
All this, took its toll on consumer demand - sales of cars for instance shrank by some 23.8 per cent in October alone, a festive month when traditionally buying is considered auspicious. At the same time, high cost loans saw investment by companies and the government declining 0.6 per cent during the July to September 2011 period. Many firms including airlines such as Kingfisher and Air India, unable to pay interest on their loans started asking their banks to lower interest rates and to convert loans into equity.
“Inflation, policy induced high interest rate structure, combined with the fact that banks are unable to lend properly because of rising bad loans has slowed down growth,” said Prof N.R.Bhanumurthy from the prestigious government funded think tank - National Institute of Public Finance & Policy. A crisis in the Euro-zone and slow recovery of the American and Japanese economies, major markets for the Asian giant, has meant India’s exports  have slowed down – export growth in October was just 10.8 per cent compared to 36.36 per cent in September with little real expectations of a pick up in the months ahead.
India’s chief economic advisor Kausik Basu, was quoted  by wire agencies as agreeing on a slowdown in policy making. “There is some slowdown in decision making,” Basu was quoted as saying while explaining the causes of the slowdown which he also blamed on a global recession and inflation at home. An open letter written by captains of industry including IT Czar Azim Premji, Keshub Mahindra of M&M, Anu Aga of Thermax and HDFC's Deepak Parekh had also complained of a “growing governance deficit”
The rising chorus of complaints on this, however saw the government take a slew of policy decisions in the last few weeks – reservation for small businesses in government purchases, relaxation in norms on foreign borrowings, increased incentives for exports, allowing foreign investment in retail, clearance to opening up pension funds to foreign investors, among others. But economists say the long delay in policy decisions had by then taken its toll on the domestic investment climate.   
A global recession in 2008-9 had seen the Indian economy which had till then grown at an average of 9 per cent for three straight years, slowing down to 6.8 per cent. But since then, India’s economy, had picked up to grow by 8 per cent in 2009-2010 and 8.5 per cent in 2010-2011.
This year’s growth rate had originally been pegged at 9 per cent and then recast at 8-8.25 per cent, a couple of months back by finance minister Pranab Mukherjee. But somewhere down the line, the combination of tight money, slow policy decision making, high inflation, cheaper rupee impacted the India Growth story.   
The NIPFP has in a note said it expects growth to remain modest in the next two quarters too and the economy could end the financial year with a growth rate of just 7.2 per cent, far lower than what is being forecast by government circles – 7.5-7.75 per cent. Said Bhanumurthy “but the real worry is that our forecast says that the slowdown will persist next year too with GDP growth crawling up 20 basis points to 7.4 per cent in 2011-2012.”
Not that India alone has suffered. Of the much touted BRICS economies, China grew it slowest since 2009 by growing 9.1 per cent in the July-September quarter while South Africa’s economy expanded by a dismal 1.4 per cent during the same period. Brazil is expected to grow between 3-4 per cent this year. The silver lining however is that “among major economies India will still remain the second fastest growing one after China,” according to Bhanumurthy.