Why is the Reserve Bank spinning yarns about growth?

05 Sep 2011

1

Economists, industrialists and heads of industry associations have been issuing warnings for some time, but these have had about as much effect as water on a duck's back. But three near-simultaneous developments, reported within hours of each other, should force it to take notice.

First, the growth of GDP in  the first quarter of 2011-2012 ( April to June) has fallen to 7.7 per cent. This is the first time in the past six years that, barring a brief dip at the height of the global recession in 2008-09, it has fallen below eight per cent. The main cause was a huge fall in the growth of construction from 7.7 per cent in the same period last year to 1.2 per cent this year.  

Second, the sales of passenger cars  has fallen by almost 9 per cent in August. Coming after a less marked fall in July, this has more than wiped out the entire increase that took place in the first quarter of the year. As a result there has been an absolute decline in the  sale of cars in the first five months of 2011-12.

Third, and most ominous, the Centre for Monitoring the Indian Economy has reported a drop in new investment intentions, announced during the first quarter, of 55 per cent over the same quarter of last year. This estimate is especially significant because it covers not only manufacturing but the services sector as well.

Fourth, The Purchase Managers Index (PMI),  which reflects the acquisition of goods and services by a sample of 500 companies, shows that in  August factory output grew at  the slowest rate in the past 29 months, i.e since the bottom of the global recession in early 2008.

These indicators reinforce the trend witnessed in the index of industrial production and point unswervingly in one direction - the Indian economy is slowing down, and what is more, doing so rapidly. What is more, the drop in the  purchase manager's index and in investment intentions make it absolutely certain that the slowdown will continue and probably deepen in the next six months.

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