Mid-Year Economic Analysis FY13: Overview of the economy
The slowdown in the Indian economy that began in the second quarter of 2011-12, when the growth rate declined to 6.7% from a level of 8.0% in the first quarter, continued in subsequent quarters. Growth has been in the range of 5.3-5.5% in the last three quarters (Q4 of 2011-12 to Q2 of 2012-13).
The Indian economy after reporting fairly robust growth of over 9% during 2005-08, moderated to a growth of 6.7% in 2008-09 because of the global financial crisis. Because there was fiscal and monetary space, timely stimulus allowed the economy to recover fairly quickly to a growth of 8.4% in 2009-10 and 2010-11. Since then, however, the fragile global economic recovery and a number of domestic factors have led to a slowdown once again.
1.2 The slowdown in the Indian economy that began in the second quarter of 2011-12, when the growth rate declined to 6.7% from a level of 8.0% in the first quarter, continued in subsequent quarters. Growth has been in the range of 5.3-5.5% in the last three quarters (Q4 of 2011-12 to Q2 of 2012-13). The slowdown is not just confined to India. There has been a general slowdown in the global economy which has been passing through a rather prolonged phase of uncertainty. The recovery from the global crisis of 2008-09 in the advanced economies has been uneven, with a decisive resolution yet to emerge to the sovereign debt problem in the Euro zone. Having achieved a GDP growth of 5.1% in 2010, the rate of growth in the global economy declined to 3.8% in 2011 and is expected to decline further to 3.3% in 2012, as per the World Economic Outlook released by the IMF in October 2012. The rate of growth of advanced economies declined from 3.0% in 2010 to 1.6% in 2011 and is expected to decline further to 1.3% in 2012. Even the emerging economies have slowed down during this period, partly as a result of the slowdown in their export markets. China’s growth declined from 10.4% in 2010 to 9.2% in 2011 and is expected to be 7.8% in 2012. Brazil’s growth dipped from 7.5% in 2010 to 2.7% in 2011 and is expected to be 1.5% in 2012.
1.3 The growth rate of the Indian economy (measured in terms of GDP at factor cost at 2004-05 prices) was 5.4% in the first half (H1) of year 2012-13 as against 7.3% in the corresponding time period of the previous year. The growth for the full year of 2011-12 was 6.5% vis-à-vis the growth rate of 8.4% achieved in each of the previous two years i.e. 2009-10 and 2010-11. The slowdown has been all pervasive and almost all the sectors have been affected. The growth rate has been 2.1% for agriculture and allied sectors, 3.2% for industry sector and 7.0% for the services sector in the first half of 2012-13. The growth rates were 3.4%, 4.7% and 9.5%, for agriculture, industry and services, respectively in H1 of 2011-12. The growth of GDP in the first and second quarters of 2012-13 was 5.5% and 5.3% respectively (Table 1.1).
Table 1.1: Quarterly Growth in GDP (per cent)
|1||Agriculture, forestry & fishing||3.7||3.1||2.8||1.7||2.9||1.2||3.4||2.1|
|a||Mining & quarrying||-0.2||-5.4||-2.8||4.3||0.1||1.9||-2.8||0.9|
|c||Electricity, gas & water supply||8.0||9.8||9||4.9||6.3||3.4||8.9||4.8|
|a||Trade, hotels, transport & communication||13.8||9.5||10||7||4||5.5||11.6||4.7|
|b||Financing, insurance, real estate & business services||9.4||9.9||9.1||10||10.8||9.4||9.6||10.1|
|c||Community, social & personal services||3.2||6.1||6.4||7.1||7.9||7.5||4.7||7.7|
|GDP at Factor Cost||8.0||6.7||6.1||5.3||5.5||5.3||7.3||5.4|
1.4 The slowing growth rate in India during the first half of 2012-13 can be explained in terms of both global factors and domestic factors. The slowdown in growth in advanced economies and near recessionary conditions prevailing in Europe resulted not only in lower growth of international trade but also lower capital flows. The growth rate of India’s exports declined. At the same time, however, the international price of crude oil remained high. India’s trade and current account deficits widened. Turning to domestic factors, rainfall in the monsoon season of 2012-13 has been below normal, particularly in the key months of June and July. This affected sowing and resulted in a lower growth rate of agriculture and allied sectors. The Reserve Bank of India continued to follow a relatively tight monetary policy to control inflation, although there has been some relaxation in the recent months in the Statutory Liquidity Ratio (SLR) as well as Cash Reserve Requirement (CRR). The cost of borrowing remains at elevated levels and this has had an impact on investment and growth in the economy, particularly that of the industry sector. Finally, bottlenecks in project implementation have made financing more difficult and investors more cautious.
1.5 The reduction in the growth rate of the services sector in the first half of current year vis-à-vis the first half of 2011-12 was primarily due to a reduction in the growth rate of ‘Trade, hotels, transport and communications’ sector from 11.6% in H1 of 2011-12 to 4.7% in H1 of 2012-13. Within the services sector, this sub sector is the most crucial and accounts for nearly 45 to 50% of the value added of services sector. Growth in activities like trade, hotels and transport, etc. are linked with the growth of agriculture and industry sectors and a slowdown in these activities has had an adverse impact on the growth of the trade and transport sectors. In contrast, the growth of financial, business and community and social services in the first half of the current year was in fact, higher than the growth rate for these sectors in the corresponding period of 2011-12.
Table 1.2: Sectoral Contribution of GDP at factor cost (per cent)
|1||Agriculture, forestry & fishing||13.5||11.1||17.2||13.9||13.2||10.7||12.3||12.0|
|a||Mining & quarrying||2.1||2.0||2.0||2.2||2.0||1.9||2.0||2.0|
|c||Electricity, gas & water supply||2.0||2.0||1.8||1.8||2.0||2.0||2.0||2.0|
|a||Trade, hotels, transport & communication||28.9||28.5||27.1||28.1||28.5||28.6||28.7||28.5|
|b||Financing, insurance, real estate & business services||18.2||18.7||17.4||17.4||19.1||19.4||18.4||19.3|
|c||Community, social & personal services||11.7||14.1||12.1||13.9||12.0||14.4||12.9||13.2|
1.6 The sectoral composition of the GDP (in terms of its relative shares) undergoes a change depending on the relative performance of different sectors. The sectoral composition of GDP is shown in Table 1.2. The quarterly shares reflect seasonal aspects also and may not change significantly in the short run. However, the long-term trends clearly show that the share of agriculture sector has been declining. This is to be expected – agriculture declines as a share of GDP as countries grow. In India, however, the services sector became the dominant sector, without a significant increase in industrial sector. In fact, the share of the industrial sector in GDP has remained in the range of 25-29% since the late 1960s. A decline in the share of the agricultural sector has been offset by an increase in services sector since then.
1.7 The contribution of services sector to incremental growth has been significantly increasing over time. Nearly 60% of the increase in GDP is accounted for by the services sector in the last two decades. In fact, since 2008-09 the contribution of services sector in the increase in GDP has been 73% (Fig 1.1).
1.8 The growth rate in terms of GDP at market prices fell even more sharply in the first half of 2012-13. The growth declined from 7.9 per cent in H1 of 2011-12 to 3.4% in H1 of 2012-13.Almost all the major components of GDP at market prices viz. private final consumption expenditure, gross fixed capital formation, exports as well as imports declined significantly. The exception has been government final consumption expenditure that registered an increase. The sectoral composition of expenditure side of GDP is shown in Table 1.3.
Table 1.3: Sectoral Composition of GDP at Current Market Prices