Rama Krishna Vadlamudi, HYDERABAD

12 September 2012

www.ramakrishnavadlamudi.blogspot.com
Indias GDP growth rate seems to have stabilized at 5.5 per cent or between 5 to 6 per cent. The gross domestic product or national income growth rate is below six per cent for the second time in a row, after reaching lowest multi-year growth rate of 5.3 per cent in the January-March 2012 quarter. The growth rate for AprilJune 2012 is at 5.5 per cent, according to latest official estimates announced on 31 August 2012. By all indications, it seems 5 to 6 per cent GDP growth rate for India is the New Normal, as they say. What are the reasons for the slowdown and what is in store for Indias future growth? Find out.

First Quarter GDP

The first quarter for India is from April to June. During 2012-13, the first quarter GDP recorded a growth rate of 5.5 per cent. This is driven by construction sector, which clocked a growth rate of 10.9 per cent over the first quarter of 2011-12. Other sectors that contributed to the 5.5 per cent growth in the first quarter are: finance, insurance, real estate & business services (10.8 per cent); community, social & personal services (7.9 per cent); and electricity, gas & water supply (6.3 per cent). As can be seen from the following graph, the growth rate in the first quarter of current year has fallen to 5.5 per cent from a high of 9.2 per cent in the fourth quarter of 2010-11, showing a rapid deceleration in the GDP growth rate.
Quarterly GDP growth rate %
10.0 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 9.2 8.0 6.7 6.1 5.3 5.5

Q4: 2010-11

Q1: 2011-12

Q2: 2011-12

Q3: 2011-12

Q4: 2011-12

Q1: 2012-13

Note: GDP at factor cost at constant prices (2004-05). Data from CSO.

Rama Krishna Vadlamudi, Hyderabad 12 September 2012 www.ramakrishnavadlamudi.blogspot.com

Investment Activity Hits Rock Bottom

The most worrying factor is the lack of any meaningful growth in investment activity in the country. Due to a virtual halt in government clearances for new projects, lack of environmental approvals, bottlenecks in coal supply linkages and other policy inactions, new projects are not coming up at the desired level in the economy. This is shown in the gross fixed capital formation (GFCF), which is a measure of total investments made in the economy. It is measured by the total value of all fixed assets acquired less disposals, plus certain additions. At constant (2004-2005) prices, the GFCF is estimated at Rs 4,49,701 crore in the first quarter of 2012-13 as against Rs 4,46,754 crore in the first quarter of 2011-12, showing a dismal growth of less than one per cent. This dismal situation is corroborated by other indicators, like, IIP. In terms of GDP at market prices, the rates of GFCF at current and constant (2004-2005) prices during Q1 of 2012-13 are estimated at 29.9 per cent and 32.8 per cent, respectively, as against the corresponding rates of 31.2 per cent and 33.9 per cent, respectively in Q1 of 2011-12.

What of the Future?

The future for new investment activity is dicey. The Government of India seems to be in no mood to revive the slowing economy despite hopes of some policy initiatives from the government. Indias prime minister, blames the opposition parties for lack of political support to policy reforms; while the opposition parties are pointing their fingers at the prime minister; while the truth lies in between. Various estimates put out by different agencies put Indias GDP growth for the current financial year 2012-13 at between 5 and 6.5 per cent. The most pessimistic estimate is from Morgan Stanley at 5.1 per cent. Other estimates are: Reserve Bank of India Crisil Ltd, Moodys & CLSA Citigroup 6.5% 5.5% 5.4%

The reasons attributed by the private agencies for their pessimism are: Governments lack of control on fiscal deficit and growing public debt Sticky inflation which remains at elevated levels of 7 per cent or more Policy inaction from the Government on various reforms or measures The continued dissonance between Indias ruling and opposition parties The debt problems in eurozone and the US

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Rama Krishna Vadlamudi, Hyderabad 12 September 2012 www.ramakrishnavadlamudi.blogspot.com

My Take on the GDP Estimate

A wise man has once said that the best estimate for the next value is the same as the current value. The latest quarter growth rate is 5.5 per cent and so the best estimate for the next quarter could be 5.5 per cent, which gives an average of 5.5 per cent for the first half-year 2012-13 of 5.5 per cent. What about the next half-year? Let us see some past data as given below:
Half-Yearly GDP Growth Rate %
H1 12.0 10.0 8.0 6.0 4.0 2.0 0.0 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 H2

9.9 9.6

9.1 8.9

7.8 5.8

7.5

8.4

8.0

8.7 7.3 5.7

Note: GDP at constant prices (1999-2000) for years from 2006-07 to 2008-09 and at constant prices (2004-05) for years from 2009-10 to 2011-12. Data source: CSO.

The above graph shows in the last two years, only two years (2009-10 and 201011) have seen GDP growth rates higher in second half-year than that of first half. So my presumption is that second half growth could be much lesser than that of first half, though absolute GDP in second half is higher than that of first half. Even if we assume that the Government takes some policy initiatives to revive the economy, it will take another three to four quarters to reflect in the GDP figures. Considering the fact that the economy recorded a growth of 5.7 per cent in the second half of 2011-12, my guesstimate is that the economy may not be able to do any better in the second half of 2012-13. Overall, it is safe to predict that Indias real GDP for the financial year 2012-13 is likely to grow by 5.5 per cent. As we have seen repeatedly in the past, the Government and its cheerleaders will try to talk up the growth rate without any concrete measure on the ground level. As a nation we muddle on with our dithering, the countrys poor and lower middle classes will continue to suffer with higher food prices, malnutrition, poor healthcare and skills deficit. The 2012-13 GDP estimate of 5.5 per cent is the New Normal for India.

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Rama Krishna Vadlamudi, Hyderabad 12 September 2012 www.ramakrishnavadlamudi.blogspot.com

My assumptions in arriving at the above GDP estimate are: 1).The Government will continue with its dithering over policy reforms despite all talks to the contrary as it is bogged down in corruption scandals 2). Indias ruling party seems to have lost its credibility with the common people and the prime minister has given the impression of being directionless and politically incompetent to take any policy reforms 3).The fiscal room available to revive the economy is limited at this point of time as the fiscal deficit is going to be very high in future 4).The Government will be unable to reduce its subsidy burden from fuel (diesel and LPG especially), food and fertilizers 5).Any downgrade of country rating by Standard & Poors will further weaken the sentiment about India in the short term 6).No doubt this is a crude attempt at estimating the GDP figures ---

Sorry friends, if I sound very gloomy about the economy, but this is the reality and let us face it squarely!

CSO Central Statistics Office of the Government of India IIP Index of Industrial Production Graphs: Author Data source: CSO Disclaimer: This should not be construed as a recommendation by the author. The author has a vested interest in the general stock market going up. The views of the author are personal and he changes his views on the market and economy very quickly depending on various factors. Readers or investors must consult their certified financial advisors before taking any decision on their investments and the investment should be in line with their risk profile & risk appetite and their general market perception.

You can access my articles on financial markets at: www.ramakrishnavadlamudi.blogspot.in

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