Private final consumption expenditure (PFCE) at current prices was estimated at Rs. 12,436.81 billion in Q2 of 2011-12 as against Rs. 10,712.21 billion in Q2 of 2010-11. Government final consumption expenditure (GFCE) at current prices was estimated at Rs. 2,223.56 billion in Q2 of 2011-12 as against Rs. 1,964.98 billion in Q2 of 2010-11. Gross fixed capital formation (GFCF) at current prices was estimated at Rs. 5,842.36 billion in Q2 of 2011-12 as against Rs. 5,456.60 billion in Q2 of 2010-11. The slowdown in private consumption is worrying; as India’s growth is driven by domestic consumption if this shows signs of coming off, then fear of a protracted slowdown may become real. PFCF (at constant prices) grew at 5.9 per cent in Q2, compared to 8.9 per cent in the similar quarter of last year. What is also surprising is the fact that, while export growth has held up well despite the deteriorating global economic scenario, import growth has halved in the second quarter to 10.9 per cent compared with 23.6 per cent recorded in the previous quarter.
The GDP figures are a vindication of the weakness already apparent in the industrial sectors, according to the Confederation of Indian Industry; industrialists have been dealt the double whammy of a gloomy external scenario and increasing borrowing costs at home. Output growth in eight core industries, including steel, cement and coal, , with more than one-third weight in the Index of Industrial Production, dropped to near-zero in October, a sharp decline from 7.2% a year ago, signaling the possibility of a sharp deceleration in industrial growth. The uncertain global outlook has led to the shelving of several projects, while tougher credit conditions have eroded corporate profits mainly through interest outgoes. The weakness in the Indian rupee, which touched a historic low of 52.73 against the dollar in November, has contributed to the woes of several importers and corporates; in 2011 so far the rupee has depreciated by 14.8 per cent against the US dollar. India’s headline inflation has remained above the 9 per cent mark for 11 consecutive months; businesses are finding it increasingly difficult to pass on price pressures to the consumer, without losing out on sales.
On the other hand, the fiscal deficit for the first seven months (April-October) of the current fiscal has already hit 75 per cent of targeted deficit for the entire year, according to data released by the Controller General of Accounts (CGA); the Centre has pegged the fiscal deficit target for 2011-12 at 4.6 per cent of GDP. With industrial output slowing down, not much growth is expected in advance tax collections and thus the possibility of a slippage in the fiscal deficit is not ruled out. The Finance Minister, however, has cautioned that too much emphasis on meeting the fiscal deficit target may hurt economic growth—a pointer that the government may refrain from any aggressive tightening on the expenditure front in a falling growth scenario. Central banks across the globe have turned dovish as growth has stalled; even the central bank of China has decided to lower the reserve requirement ratio (RRR or the amount of cash that lenders must set aside as reserves) at China’s financial institutions by 0.5 per cent in order to ease credit crunch that is stalling growth. The RBI has already indicated a neutral bias unless the inflation situation spins out of control.
Have a closer look at the GDP figures and more data in our forthcoming monthly statistical bulletin—E-UpDates.