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 % !

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.