Q4FY12 GDP - ALARM BELLS RINGING, WAKE UP UPA!

By Ruma Dubey

This is the lowest growth since Q4FY03.

The real shocker was manufacturing which was just slipped into negative. The farm sector growth at 1.7% was disappointing. Ironically, the third advance estimates of crop production released by the Ministry of Agriculture showed an upward revision as compared to their second advance estimates in 2 the production of rice (103.41 million Tonnes from 102.75 million Tonnes), wheat (90.23 million Tonnes from 88.31 million Tonnes) and sugarcane (351.19 million Tonnes from 347.87 million Tonnes) for the year 2011-12. So where was the mismatch?

Investment deceleration is worrying but surprisingly, Q4 gross fixed capital formation was up 5.5% on a YoY. It does mean that there has been some narrowing of the gap between investment and consumption. Thigh composition of growth is worrying, high fiscal deific is boosting consumption but crowding out investment, and unless we see revival in investments, we cannot expect growth to go ahead much from here. Unless action happens from the Govt side, we do not see too much light at the end of this tunnel.

In the transport and communication sectors, the sale of commercial vehiclesQ4Fy12 on a YoY was up 16% but cargo handled at major ports fell 7.5%, cargo handled by the civil aviation fell 13.3% and passengers handled by the civil aviation rose 2.3%.

The govt needs to introspect, read these figures carefully and give thought – it needs to get into action or else, the Indian economy could fall into the abyss. The Govt needs to take steps to stimulate growth and if the Govt continues to announce only pro-poor policies to catch the vote bank, it might miss out on the bigger picture. Incidentally, the pro-poor policies are not too working too well, infact the gap between the haves and the have not’s has only widened. Govt needs to focus on supply side issues.

How do we get corporate confidence up? That has to be the biggest question and not whether or not RBI will reduce rate. RBI has been doing its job very well, with absolute diligence but the laggard causing this failure is obviously the Govt.

Very real supply constraints have developed like in infra, mainly land acquisitions which does not require big bang reforms. The fall in manufacturing is alarming and this is a direct consequence of the fall in investments and many projects getting stalled. The CMIE report which stated that over Rs.5 lakh crore worth investments currently stands stalled or cancelled comes all the more into perspective.

Estimates for Brazil growth is being revised downwards, China is also not looking too encouraging now. Europe is a mess and USA data is not exactly encouraging. Global macro factors have been so bad. But blaming it all only on the global factors would be foolish. The Govt needs to wake up and realize that we have major domestic issues and if these are not addressed as soon as possible, along with global factors, the issues could manifest into a long protracted period of pain.

When growth comes down, doesn’t inflation also come down as it indicates a fall in all the macro factors of growth? So maybe RBI needs to now shift its focus to bolstering growth. The RBI, as we have mentioned earlier, will wait for more data to come in before it takes call. Well, RBI is scheduled to meet on 18th June and before that, IIP for April will come in on 12 June, not to mention that we will see another set of WPI numbers too. Thus currently, based on these numbers alone, it would be too hasty to try and discern what the RBI might do. There will be more data coming in before it decides and hence best to see how that data pans out.

Q1FY13 is expected to remain under pressure and if we assume that Europe settles a bit by Q2, even then GDP might not be over 6%. And if Europe does not get resolved, well, then all figures will go for a toss. So expecting a growth rate of 6.5% to 7% at this juncture seems Utopian. No one expected rates to fall to these 5.3% and hence currently giving any estimates would be foolhardy.

The positives that we should concentrate on: falling crude prices and with growth tapering off, maybe inflation will finally come off. We would be better off writing off the current first two quarters and maybe things will start looking up only from 2013 but for now, we are looking at a lot of pain.

The next release of quarterly GDP estimate for the quarter April-June, 2012 (Q1 of 2012-13) will be on 31.08.2012.