With both domestic and global factors that had impacted India’s growth during 2011-12
remaining unresolved, growth remained sluggish during Q1 of 2012-13. Indicators suggest that
the slowdown continued into Q2 of 2012-13 with slack industrial activity and sub-par services
sector performance. Despite unconventional monetary easing by several advanced economies,
global growth prospects have weakened since the previous quarter thus adversely impacting the
near-term growth outlook for India. However, recent policy reforms by the government, albeit
with some lag, should contribute towards arresting the downturn by easing some domestic
constraints. Measures to remove constraints facing the infrastructure sector would be crucial
for growth revival.
Global growth prospects weaken over the
previous quarter
I.1 The global growth outlook has
deteriorated further as the sovereign debt
overhang, fiscal adjustments, banking fragilities
and financial market uncertainties, especially in
the euro area, weighed on growth prospects.
Sequentially, growth decelerated in Q2 of 2012
in the US, Japan and China while euro area and
UK failed to register positive growth. Though
there have been signs of a mild recovery in the
US housing markets, the possibility of the
occurrence of a US fiscal cliff poses a significant
risk to the US and global recovery, despite the
“open-ended” quantitative easing announced by
the Federal Reserve. The fiscal cliff refers to a
possible large reduction in the federal budget
deficit between 2012 and 2013 on account of
certain tax hikes and spending cuts becoming
effective from January 2013.
I.2 The IMF’s World Economic Outlook
(WEO) released earlier this month, further
marked down its global growth forecast for
2012 to 3.3 per cent from the July 2012 estimate
of 3.5 per cent. This is mainly due to a downward
revision in growth projection for EDEs to 5.3
per cent from 5.6 per cent in July 2012. The
growth forecast for advanced economies (AEs)
has been reduced by 0.1 percentage point to 1.3
per cent. The latest revision in global growth
forecast for 2012 means a cumulative downward
revision of 1.2 percentage points since April 2011, when global recovery had gained strength
(Chart I.1).
I.3 The US economy expanded by 2.0 per
cent (annualised) in Q3 of 2012, faster than 1.3
per cent in Q1 of 2012. Euro area output
contracted at a rate of 0.7 per cent (annualised)
in Q2. The employment scenario in the AEs also
continues to be grim. The unemployment rate
in the US, however, declined to 7.8 per cent in
September 2012 from 8.1 per cent in August
2012.
I.4 Spillovers from AEs and domestic
constraints have affected economic activity in
EDEs as well. The BRICS economies continued
to slow. China’s growth decelerated for the
seventh consecutive quarter to 7.6 per cent
(y-o-y) in Q3 of 2012. Only Q2 data is available
for the other countries. Russia’s growth weakened further to 4.1 per cent in Q2 of 2012,
decelerating continuously for three successive
quarters. Brazil’s growth fell for the tenth
successive quarter to 0.5 per cent. South Africa’s
growth improved marginally, but has stayed
below 3.0 per cent in the preceding four
quarters. With risks to global growth and trade,
near-term improvement in growth prospects for
EDEs seems unlikely.
|
I.5 Global industrial production grew at the
rate of 1.7 per cent in August 2012, its slowest
pace since zero growth in November 2009
(Chart I.2). Lead indicators such as Purchasing
Managers Index (PMI) suggest no significant
improvement in Q3. The volume of world trade
fell in July 2012 (Chart I.3). Slowdown in global
industrial activity and trade could adversely
impact India’s growth prospects, given the interlinkages.
Risks from the impending US ‘fiscal cliff’
remain significant
I.6 A major downside risk to global growth
is now looming from the US fiscal cliff. The US
Congressional Budget Office forecasts that
the US fiscal deficit will decline by 3.3
percentage points to 4 per cent of GDP in 2013.
Such a sharp fiscal consolidation may have a
deleterious impact on global growth (Table I.1).
There could be an adverse impact of the US
fiscal cliff on India’s growth. If global growth
slumps, there would be spillover impact on current account as well, though some offset may
be available if global commodity prices fall.
Table I.1: Global Implications of the US
‘Fiscal Cliff’ |
|
Percentage point change from the baseline |
GDP |
Current
Account
Balance* |
Fiscal
Balance* |
1 |
2 |
3 |
4 |
World |
-1.0 |
– |
0.4 |
US |
-2.2 |
1.2 |
2.9 |
High Income Countries |
-1.1 |
0.1 |
0.8 |
Euro Area |
-0.4 |
-0.3 |
-0.1 |
Developing Countries |
-0.6 |
-0.4 |
-0.3 |
South Asia |
-0.2 |
0.1 |
0.1 |
Source: World Bank Estimates.
* as per cent of GDP. |
Growth in India was sluggish in Q1 of
2012-13
I.7 Growth during Q1 of 2012-13, at 5.5 per
cent, was marginally higher than in the previous
quarter, but much lower than the 8.0 per cent
growth registered in the corresponding quarter
of 2011-12. The deceleration was seen across
all the three major sectors, particularly the
industrial and services sectors (Table I.2). The
slowdown in manufacturing has been particularly
severe. The services sector moderated for the
second successive quarter in tandem with a
sharp deceleration in the growth of ‘trade, hotels, transport, storage and communication’,
even as construction picked-up.
|
Table 1.2: Sectoral Growth Rates of GDP (at 2004-05 prices) |
(Per cent) |
Item |
2010-11* |
2011-12# |
2011-12 |
2012-13 |
Q1 |
Q2 |
Q3 |
Q4 |
Q1 |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
1. Agriculture & allied activities |
7.0 |
2.8 |
3.7 |
3.1 |
2.8 |
1.7 |
2.9 |
2. Industry |
6.8 |
2.6 |
6.5 |
2.7 |
0.9 |
0.7 |
0.8 |
2.1 Mining & quarrying |
5.0 |
-0.9 |
-0.2 |
-5.4 |
-2.8 |
4.3 |
0.1 |
2.2 Manufacturing |
7.6 |
2.5 |
7.3 |
2.9 |
0.6 |
-0.3 |
0.2 |
2.3 Electricity, gas & water supply |
3.0 |
7.9 |
7.9 |
9.8 |
9.0 |
4.9 |
6.3 |
3. Services |
9.2 |
8.5 |
9.3 |
8.5 |
8.7 |
7.5 |
7.4 |
3.1 Trade, hotels, transport, storage & communication etc. |
11.1 |
9.9 |
13.8 |
9.5 |
10.0 |
7.0 |
4.0 |
3.2 Financing, insurance, real estate & business services |
10.4 |
9.6 |
9.4 |
9.9 |
9.1 |
10.0 |
10.8 |
3.3 Community, social & personal services |
4.5 |
5.8 |
3.2 |
6.1 |
6.4 |
7.1 |
7.9 |
3.4 Construction |
8.0 |
5.3 |
3.5 |
6.3 |
6.6 |
4.8 |
10.9 |
4. GDP at factor cost (Total 1 to 3) |
8.4 |
6.5 |
8.0 |
6.7 |
6.1 |
5.3 |
5.5 |
*: Quick Estimates. #: Revised Estimates.
Source: Central Statistics Office. |
I.8 Since the second week of September
2012, the government has announced a number
of policy measures towards fiscal consolidation
by reducing fuel subsidies and clearing stake
sales in public enterprises. It has also taken
several other reform measures (see Table VII.1
on reform measures). While these measures
have helped improve sentiments, their impact
on growth will be felt with a lag, particularly
after the substantive implementation of the
initiatives relating to FDI and infrastructure.
Negative output gap likely to persist in
2012-13
I.9 The potential growth rate of the Indian
economy peaked around the middle of 2007-08,
and has since continued its downward slide into
Q1 of 2012-13 (Chart I.4). There are many
methodological issues surrounding the
estimation of potential output and the range of
empirical estimates leaves considerable
uncertainty. Nevertheless, what is clear is that
potential output has been impaired as a result
of the fall in savings and investment, high
inflation and domestic structural impediments compounded by cyclical global slowdown.
Current estimates suggest that potential growth
may have now dropped to around 7.0 per cent.
The output gap has been negative for four
consecutive quarters.
Delayed and uneven monsoon has impacted
kharif production though rabi prospects
seem better
I.10 In 2012, not only was there a delay in the
onset of the south-west monsoon, but its
progress and distribution was uneven, especially
during the crucial kharif sowing period of June
and July. This resulted in delayed sowing of
most crops. Although rainfall improved during
August and September, the cumulative rainfall
for the country as a whole (up to September 30)
was 8 per cent below the LPA. The production-weighted
rainfall index (PRN) constructed by
the Reserve Bank indicated a deficiency of 13
per cent for the season as a whole (Chart I.5).
I.11 Deficient rainfall resulted in shortfall in
area sown for several crops, notably coarse
cereals and pulses (Table I.3). The delay in
sowing, particularly in July 2012 adversely
impacted the production of kharif crops in 2012
as indicated by the First Advance Estimates.
Revival of monsoon during the latter half of the season and the governments contingency plans
to tackle the drought-like situation, to an extent,
helped in moderating the adverse impact of
deficiency of monsoon during June and July
2012. The late recovery of rainfall, especially
during September has improved soil moisture
content and reservoir levels, thus improving the
prospects for winter and rabi crops which could
help in compensating for the loss of kharif
crops.
|
I.12 The current stock of around 67 million
tonnes (September 2012) of rice and wheat is
more than sufficient to meet the requirements
of buffer norms (Chart I.6). However, food and nutrition security at stable prices remains a
concern as food prices experienced significant
upward pressures with the deficiency in
monsoon (for details see Chapter VI. Price
situation). There was also a spurt in futures
prices of some agricultural commodities during
June-July owing to concerns about a weak
monsoon.
Table I.3: Kharif Sowing and Production |
(Area in million hectares; Production in million tonnes) |
Crop |
Normal |
Sowing* |
Kharif Production |
Percentage change
over 2011 |
2011 |
2012 |
2011
4th Advance
Estimate |
2012
1st Advance
Estimate |
Sowing (4) over (3) |
Production (6) over (5) |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
Foodgrains |
71.9 |
72.1 |
66.5 |
129.9 |
117.2 |
-7.8 |
-9.8 |
Rice |
39.1 |
40.1 |
39.2 |
91.5 |
85.6 |
-2.2 |
-6.4 |
Coarse Cereals |
21.9 |
20.7 |
17.8 |
32.3 |
26.3 |
-14.0 |
-18.6 |
Pulses |
11 |
11.3 |
9.5 |
6.2 |
5.3 |
-15.9 |
-14.5 |
Oilseed |
17.9 |
18.5 |
17.5 |
20.8 |
18.8 |
-5.4 |
-9.6 |
Sugarcane |
4.7 |
5.1 |
5.1 |
357.7 |
335.3 |
0.0 |
-6.3 |
Cotton# |
9.9 |
12.2 |
11.6 |
35.2 |
33.4 |
-4.9 |
-5.1 |
Jute and mesta ## |
0.8 |
0.8 |
0.8 |
11.6 |
11.3 |
0.0 |
-2.6 |
All- Crops |
105.2 |
108.7 |
101.5 |
- |
- |
-6.6 |
- |
*: Full Season. #: Million bales of 170 kgs each. ##: Million bales of 180 kgs each.
Source: Ministry of Agriculture, Government of India. |
Recovery of investment essential for
industrial growth
I.13 The growth in index of industrial
production (IIP) decelerated sharply during
April-August 2012 compared with the
corresponding period of the previous year. This
was mainly due to a decline in capital goods
production highlighting the slowdown in
investment activity (Table I.4). The contraction
of the mining sector also contributed to the
slowdown in industrial production. Excluding
capital goods, the growth rate of overall IIP
during April-August 2012 was 2.7 per cent
(Chart I.7).
I.14 The slowdown in industrial activity is
reflected across all sectors. Manufacturing
sector output did not grow during April-August
2012, reflecting subdued investment activity
and moderation in external demand. Major subsectors
of manufacturing, such as electrical
machinery and apparatus, motor vehicles, food
products and apparel contributed significantly
to the overall decline in growth of manufacturing output. The mining sector continued to contract
due to regulatory and environmental issues.
Policy uncertainties with respect to coal and
iron ore mining may act as a deterrent for this
key sector. Power generation moderated sharply
during April-August 2012, both on account of
shortages in coal supply and uneven monsoon
conditions.
Table I.4: Index of Industrial Production:
Sectoral and Use-Based Classification
of Industries |
(Per cent) |
Industry Group |
Weight
in the
IIP |
Growth Rate |
Apr-Mar 2011-12 |
April-August |
2011 |
2012P |
1 |
2 |
3 |
4 |
5 |
Sectoral |
|
|
|
|
Mining |
14.2 |
-2.0 |
-0.5 |
-0.6 |
Manufacturing |
75.5 |
3.0 |
6.0 |
0.0 |
Electricity |
10.3 |
8.2 |
9.5 |
4.8 |
Use-Based |
|
|
|
|
Basic Goods |
45.7 |
5.5 |
7.6 |
2.8 |
Capital Goods |
8.8 |
-4.0 |
7.3 |
-13.8 |
Intermediate Goods |
15.7 |
-0.6 |
0.8 |
0.6 |
Consumer Goods (a+b) |
29.8 |
4.4 |
4.4 |
3.5 |
a) Consumer Durables |
8.5 |
2.6 |
4.5 |
5.7 |
b) Consumer Non-durables |
21.3 |
5.9 |
4.3 |
1.6 |
General |
100 |
2.9 |
5.6 |
0.4 |
P : Provisional.
Source: Central Statistics Office. |
I.15 As per the use-based classification,
moderation in growth was seen in all categories except consumer durables. The contraction in
capital goods production during April-August
2012 mainly reflects weak investment demand.
There has, however, been partial substitution by
increase in capital goods imports, which
increased significantly during this period.
I.16 An analysis of the relationship between
production and imports of manufacturing goods
industries during April 2010 to March 2012
confirms that there is a statistically significant
and negative relation between domestic
production and imports in the case of textiles
and electrical machinery. The negative
association implies that textiles and electrical
machinery industries have been subject to some
loss of competitiveness, resulting in the
substitution of domestic output by imports
(Chart I.8).
I.17 To support revival in industrial growth,
there is a need to take expeditious decisions to
accelerate investments, especially by easing
policy constraints and removing major supply
bottlenecks. The recent proposal to set up a
National Investment Board (NIB) is intended
to improved co-ordination and expedite
investment clearances of large projects thus
helping to improve investment climate.
However, since a large number of project
clearances are also required at sub-national
levels, it is important to improve coordination
amongst all concerned agencies, including those
which may be beyond the ambit of NIB.
I.18 Recovery in domestic industrial
production could also be contingent on a revival
in global growth. A strong co-movement
between domestic and global IIP is observed;
the correlation coefficient of which during the
period April 2008 to August 2012 was as high
as 0.7 (see Chart I.2).
Revival of investment cycle hinges on
resolution of policy uncertainties facing
power and coal industries
I.19 The growth of eight core infrastructure
industries decelerated to 2.8 per cent during
April-August 2012 compared to 5.5 per cent
during the corresponding period of the previous
year (Chart I.9). Going forward, a reversal of
downturn facing these industries essentially
depends on revival of investment activity. This,
in turn, hinges on resolution of policy
uncertainties facing the power and coal
industries. Despite large new power capacities
reaching gestation stage during the Eleventh
Five Year Plan, these capacities have not yielded
the desired results due to input supply constraints.
Though about 55 GW of new capacity creation
was achieved, a large part of new capacity in
thermal power was affected by coal shortages.
The coal requirement for thermal power
generation during 2012-13 is estimated at 476
million tones, but indigenous supplies may be
only 407 million tonnes, requiring the balance
to be met through imports. This demand-supply gap is projected to rise further during the
Twelfth Plan. New plants that have been
commissioned on the basis of coal linkage are
facing severe constraints in the absence of
committed Fuel Supply Agreements (FSAs).
Besides, power projects are held up for want for
various clearances. Also, distribution of power
has come under financial stress, with state power
distribution companies (discoms) sitting on an
accumulated debt of `1.9 trillion as on March
2011. A large amount of bank finance is stuck
in bad loans to these discoms.
|
|
I.20 However, over the past two months
substantive progress has been made towards
resolving outstanding issues confronting the
sector. New FSAs that provide reasonable
graded penalty clauses at pre-agreed disincentive
triggers of 80 per cent of the Assured Coal
Quantity (ACQ) are now approved by the Coal
India Limited (CIL) and are expected to be
signed shortly. A scheme of financial
restructuring of discoms has now been put in
place, which will aim at bringing about a
financial turnaround of discoms (see para II.16).
However, a comprehensive solution to the coal
supply issue lies in addressing supply shortages
through imports in the interim backed by
appropriate price pooling or effective alternative
mechanisms, as also getting the coal blocks
auctions going so that issue does not linger beyond the Twelfth Plan period. So, while
existing measures are steps in the right direction,
rest of the issues would need to be resolved
expeditiously to kick start the investment cycle
in the infrastructure sector once again.
I.21 Other decisions in the recent period such
as revoking the ban on certain categories of
projects by allowing government land alienation
and permission for clearance of up to 40 hectare
of forest land at the regional level, are significant
steps towards mitigating policy uncertainties.
It has been decided that both forest and
environment clearances would be processed
simultaneously to avoid delays. Further, the
recent policy initiatives such as permitting FDI
in retail trade, civil aviation and power trading
exchanges and rationalisation of diesel prices
will help improve the investment climate.
Capacity utilisation at its lowest level in
thirteen quarters
I.22 On account of the slowdown in economic
growth, capacity utilisation measured by the
18th round of the Order Books, Inventories and
Capacity Utilisation Survey (OBICUS) of the
Reserve Bank was at a three-year low in Q1 of
2012-13 (http://www.rbi.org.in/OBICUS18).
There is a strong co-movement between
capacity utilisation and de-trended IIP
manufacturing (Chart I.10). The survey further
shows that there was higher growth in new
orders, both q-o-q and y-o-y, the latter partly due to a lower base. There was an increase in
pending orders due to inability to fully meet the
new orders.
Lead indicators of services sector signals
moderation
I.23 At 7.4 per cent, the services sector
registered its lowest growth in thirteen quarters
during Q1 of 2012-13. This was largely due to
the weak performance of ‘trade, hotels,
transport, storage and communication’ sector.
The contraction of the industrial sector and
weak demand conditions have constrained the
growth of the services sector. Leading indicators
of the services sector point towards further
moderation in growth going forward (Table I.5).
This is also corroborated by the Reserve Bank
services sector composite indicator (Chart 1.11).
Recent reform initiatives may help in
turning the tide
I.24 The slowdown in the Indian economy has
been due to both domestic as well as external
factors. The crucial domestic factor impinging
on growth was policy uncertainties and lack of
reforms. Since September 2012, a number of
reforms have been announced that should
improve the investment climate and help attract
more investment, domestic as well as foreign.
Table I.5: Indicators of Services Sector Activity |
(Growth in per cent) |
Services Sector Indicators |
2010-11 |
2011-12 |
Apr-Sep 2011-12 |
Apr-Sep 2012-13 |
1 |
2 |
3 |
4 |
5 |
Tourist arrivals |
9.5 |
8.6 |
9.3 |
3.4 |
Cement |
4.5 |
6.7 |
4.1# |
5.4# |
Steel |
13.2 |
7.0 |
9.9# |
2.7# |
Cell phone connections (in million)$ |
227.3 |
107.6 |
46.8* |
-5.7* |
Automobile sales |
16.8 |
11.2 |
12.0 |
3.6 |
Railway revenue-earning freight traffic |
3.8 |
5.2 |
4.8 |
4.8 |
Cargo handled at major ports |
1.6 |
-1.7 |
3.1 |
-3.3 |
Civil aviation |
|
|
|
|
Domestic cargo traffic |
23.8 |
-4.8 |
-5.1* |
3.8* |
International cargo traffic |
17.7 |
-1.9 |
3.9* |
-4.3* |
International passenger traffic |
10.3 |
7.6 |
8.8* |
3.3* |
Domestic passenger traffic |
18.1 |
15.1 |
18.0* |
-0.5* |
#: Data pertains to April-August.
*: Data pertains to April-July 2012.
$: Refers to wireless subscriber additions in actual numbers.
Source: Ministry of Statistics and Programme Implementation,
Ministry of Tourism, SIAM and CMIE. |
The announcement of these reform measures in
themselves are not sufficient to ensure recovery
as their impact would critically hinge on
successful implementation.
|