GDP Growth in the First Half (April-September) of FY 2011-12 Moderated to 7.3%

As per the data released by the government on 30 November 2011, Gross domestic product (GDP) growth in the first half (April-September) of financial year 2011-12 moderated to 7.3 per cent from 8.6 per cent in the first six months of 2010-11. The economic growth for the July-September quarter slowed to an annualised 6.9 per cent, due to two years of progressive monetary tightening, low domestic business confidence and a retreat of foreign capital.

Causes that prompted the fall in GDP

The continued debt crisis in the Eurozone and the economic slowdown in the U.S. also impacted the economic parameters of labour-intensive industries as manufacturing took a big hit. Growth during the July-September period of 2011-12 fell mainly due to poor manufacturing performance and declining output of the mining industry. There was also a moderation in agriculture growth as well.

Rising inflation, continued political and economic uncertainty, rising interest rates, unstable economic order and slow pace of reforms negetively impacted growth. Tight monetary policy followed by the Reserve Bank of India to tame inflation led to a drop in the manufacturing sector growth rate to 2.7 per cent in July-September from 7.8 per cent in the corresponding quarter of 2010-11.

The mining and quarrying sector output declined by 2.9 per cent, compared to 8 per cent in the second quarter of 2010-11. Agriculture production slipped to 3.2 per cent from 5.4 in the corresponding period last fiscal. GDP growth in the second quarter last fiscal stood at 8.4 per cent.

The RBI lowered its growth projection for the current fiscal to 7.6 per cent from an estimated 8 per cent.
India Inc blamed the decline on tight monetary policy, which has increased the cost of borrowings and thereby slowed down growth by hindering fresh investment.

Analysis

Headline inflation has been above the 9 per cent mark since December 2010. The government and the RBI accepted that high interest rates would hurt the country's growth prospects. The central bank however underlined that bringing inflation under control is its major agenda.

India's economy grew at the slowest rate for more than two years in the second quarter July-September quarter of 2011-12, confirming the country's shift to lower growth rates of about 7 per cent.

India's policymakers could not manage to tame inflation raging at near double-digit levels.

The last time India's gross domestic product growth fell below 7 per cent was in the quarter to June 2009, when it was struck by the effects of the global financial crisis in western economies.

The drop in the July-September quarter  from the 7.7 per cent recorded in April-June quarter is likely to raise questions over whether India can achieve the government's official target for economic growth in the 2012 fiscal year of 8.5 per cent.