Third quarter India GDP Estimates released recently by the Central Statistics Office in India suggest continued weakening in the economy for the second consecutive quarter. The economy grew 6.9% y-o-y in the third quarter of 2011 (Q2 2011-12), down from 7.7 % and 7.8% in the previous two quarters.
Driving the downward trend in the slowdown was the mining and quarrying sector (-2.9%) and manufacturing (2.7% from 7.2% previously). India’s financial and business services sector continues to be a driver of growth, up 10.5%, from 9.1% and 10% from previous quarters. Interestingly, the broad performance of the Indian economy has some similarities with the South African economy’s performance, particularly the key GDP drivers.
Private financial consumption expenditure (PFCE) as a component of GDP declined from 59.9% to 59.5%; Gross Fixed Capital Formation (GFCF) shrunk as a component of GDP from 32.8% to 30.5%; Government expenditure stayed resilient at 10.7% against a previous 10.9%. This is not a surprising result. As we mentioned in our previous note, although monetary authorities have bemoaned expansionary fiscal spending, which has been inflationary, it is partly this spending which is fueling growth this year.
Slower growth in the Indian economy indicates the tight financial conditions experienced as a result of monetary tightening aimed at containing inflation, as well as weak global conditions. This is most evident in the industrial production numbers. The Industrial Production Index shows that manufacturing contracted 5.8% year-to-date, with consumer goods falling 11.8%, while the consumer non-durables in the index fell 20%.
The Reserve Bank of India’s Monetary Policy Committee increased rates 11 times, by cumulative 375 bps, since March 2010, with the last hike of 25 basis points seen as late as October, in a bid to further reduce inflation expectations. Inflation, measured by the Wholesale Price Index, remained stubborn at 9.73% in October, slightly above September’s 9.72%.
The Indian economy can be expected to expand by just over 7.3% this year, while emerging Asia (India and China) will grow by 8.4%. the HSBC India Purchasing Managers Index indicates a rebound in activity for October. The index posted 52.4 points in October, up from September’s 50.4, indicating an expansion in activity. This should be sustained for the remainder of the year as a result of the season.
Regards
Xhanti Payi
Assistant Economist
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