New Normal Economy

March 2, 2012 by staff 

New Normal Economy, Is 6 percent the new normal for India’s GDP growth?Miserably, it feels like it. India’s GDP expanded by 6.1 percent in the quarter that ended in December, the slowest pace in nearly three years on the back of slowing business investments, high borrowing costs, high inflation and an uncertain global outlook.

Worse, no one expects a robust recovery any time soon, especially if the government doesn’t step on the accelerator on reforms.

Economic growth in the third-quarter was dragged down primarily by a decline in mining activity (down 3.1 percent), as well as a steep fall in manufacturing growth. (o.4 percent). The biggest star was the services sector, which accounted for nearly 82 percent of the growth in GDP, according to a Kotak report. Agriculture contributed merely 0.5 percent, while manufacturing contributed 0.1 percent. Construction added 0.6 percent to growth, the brokerage said.

The slump in manufacturing was matched by a 1.2 percent decline in gross fixed capital formation
The slump in manufacturing was matched by a 1.2 percent decline in gross fixed capital formation, which represents the creation of productive assets by businesses, from a year ago.

That’s a definite red flag on the economy’s health. Even as consumption (ordinary consumer spending was up 6 percent from a year ago) continues to rise, investments in capacity creation are declining, which further widen the gap between supply and demand and threaten to push prices higher in future.

It’s a problem that could spiral out of control if action is not taken soon. Over the past year, everyone from the Reserve Bank of India governor to private-sector economists have noted that the lack of adequate “supply side” measures to meet growing demand has been one of the primary reasons for prices in the economy remaining stubbornly high.

Yet, instead of tackling the problem, the government has made it worse with a bulging fiscal deficit (caused by high spending on subsidies and other non-productive spending and a shortfall in tax revenues) and policy paralysis.

No surprise then, that some brokerages like Morgan Stanley expect even the current quarter – January to March – to remain lacklustre. Led by a slump in manufacturing activity, “We expect GDP growth for the quarter ending March to be around 6.5 percent,” it noted. The brokerage even lowered its full-year growth estimate (for the financial year ending March 2012) to 6.8 percent from 7 percent.

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