No one got this right. The pessimists said that India’s economic growth won’t last long, but it did. It even crossed the 10% GDP mark in a quarter. Then, the optimists said the Indian economy won’t slow down, but it has.
Today, GDP data was released which showed Q1 FY09 growth down at 7.9% compared to 9.2% a year ago. It’s just a bit lower than the estimated figure. Perhaps that explains why the stock market was up by 3.5%, on a day when such bleak news came out. The explanation was that inflation has peaked, if you can call a change from 12.6% to 12.4% as peaking.
The slowdown for GDP growth is being blamed on monetary policy; interest rates have been steadily going up and more aggressively in recent months. Consumers have been scared off buying cars, durables, homes which in turn is leading to a slowdown for related sectors. But that’s only part of the reason. People have been finding that homes are going out of reach, due to rising prices, stretching their finances. Falling stock markets have led to an erosion of the wealth effect it was creating. That is also leading to postponing of purchases, especially non-essential ones.
At another level, falling stock markets meant that funding for companies has dried up. While IPOs have practically dried up, secondary market issues too are few. Overseas equity markets are slumbering and debt markets too have turned expensive. The easy money that was allowing companies to go ahead and expand without a worry is no longer there. It is this combination that is dangerous. Some of that is visible in the GDP numbers.
It shows private final consumption expenditure (what consumers spend) at 7.9% in Q1 FY09, marginally up compared to 7.6% a year ago. Government spending as usual continues to be lax. But capital formation growth has slowed down sharply, from 13% a year ago to 8.9%. That shows that companies are going slow on projects, either because money is hard to come by or they foresee a slip-up in demand.
That’s not a good sign because these are long term trends which don’t reverse quickly. If you look at sector-wise GDP growth, it’s the usual suspects undermining growth. Manufacturing is the main culprit, with growth halving to 5.6% and its creaking power infrastructure underperforming. Construction sector seems to have been relatively unaffected, with growth averaging 11%. Trade and hospitality slowed down a bit but growth was still a healthy 11%.
There is a marked slowdown evident in the financial services sector, though. The stock markets still think the economy can pull it off and perhaps it will. But for that a couple of things have to fall back in place. One is inflation, which at 12.4% is not funny, it needs to come down to 5-6% and there’s no telling how long it will take. Till then, interest rates will hold steady or even go higher. And then there are the global capital markets which need to recover, so that liquidity becomes abundant again.
If all these happen, then interest rates will fall again and credit will become affordable, and consumers can go back to borrowing, even recklessly. Demand will begin to pick up and things will be fine again. That’s a lot to ask for, so let’s see how it goes. Here is the data release.