Data check

The Indian economy grew by just 6.9 per cent in the second quarter,that is,from July to September 2011. This decline in GDP growth was to be expected,given the slowdown in investment activity,especially in new investment projects,over the last two quarters. The big worry,however,is that this is only the first sharp visible decline being witnessed. The next quarter may be worse and the economy could see a 6 to 6.5 per cent growth for the full current fiscal year as a whole. Exports have contributed to GDP growth significantly,and if these were to flounder with the world economy doing badly,then that could pull down GDP growth even more sharply. It is a cause for concern that GDP growth has fallen in various sectors and in manufacturing in particular. Mining output during this quarter has actually declined compared to last year.

This news comes at a time when the world economy could face a severe crisis if the eurozone is unable to sort its problems out. Some policymakers seem to believe that this will automatically pull the inflation rate down. But that is far from a given. Considering that inflationary expectations remain high,India could well enter a period of stagflation when growth falls to,say,5 per cent and inflation to roughly 10 per cent. The year-on-year numbers for inflation are likely to start coming down for three to four months due to the high base effect. However,seasonally adjusted month-on-month inflation data of various price indicators suggests that inflation will come back up unless there is a big change.

The view that GDP growth has come down because of an increase in real interest rates is also erroneous. Real interest rates,if anything,have been near zero or negative,whether measured by past inflation as an indicator of inflationary expectations or measured by surveys of inflationary expectations. The uncertainly in the global environment,the policy and governance deficits in India and the implementation risk in various sectors in the economy are far bigger factors that have made the investment climate increasingly difficult. The difficulty with the view that the RBI’s monetary tightening is responsible for the slowdown could well land India in a stagflationary environment since the central bank can do little about growth and will be prevented from doing anything about inflation.