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Worst growth story in 9 years

New Delhi, May 31: The Elephant has finally started to waddle.

After spewing out a string of chest-pounding numbers, the Indian economy slumped to record its slowest growth in nine years in the last quarter of 2011-12 (January-March) at 5.3 per cent.

The sudden and sharp slowdown wasn’t anticipated though there were enough pointers to the downturn in the previous quarters. Economists had thrown up a consensus estimate of 6.1 per cent for the quarter.

The last time that quarterly expansion of the economy was lower than Thursday’s number was in the January-March quarter of 2003 at 3.6 per cent.

For the year as a whole, the economy grew by 6.5 per cent — slower than the advance estimate of 6.9 per cent put out in February, and the 8.4 per cent growth in the previous year.

On Thursday, the rupee tumbled to another record low at 56.50 to the dollar even as the sensex slid 0.57 per cent to 16,218.53 after a precipitous fall earlier in the day.

The benchmark 10-year government bond yields fell 16 basis points as investors speculated about another interest rate cut to prop up the economy though the pundits have been discounting such a possibility in the near term.

Finance ministry officials went into a huddle during the day to cobble together a string of long-awaited austerity measures in a desperate bid to put the lid on rising fiscal deficit, which surged to 5.7 per cent in the year ended March, severely limiting the government’s options to pump up the economy through stimulus measures as it had done in the aftermath of the global economic crisis in 2008.

The Planning Commission also renewed work on changes in the country’s manufacturing policy designed to ease investment rules.

During the January-March quarter, manufacturing shrank 0.3 per cent, compared with 7.3 per cent growth in the year-ago period, while the farm sector grew by just 1.7 per cent compared with 7.5 per cent in January-March 2011.

The services sector, which for most quarters has grown by double digits, grew by 7.9 per cent during this period, its performance botched by slowing retail sales.

Policy makers and economists feel the most worrying trend in the figures released was a slowdown in consumption, traditionally measured by retail sales which grew by 7 per cent in the January-March quarter compared with 10 per cent in the year-ago period.

India’s growth story is based on domestic demand and if it slows down, the country will need more than the quick-fix solutions that the government has relied on till now to arrest the decline.

Inflation, which has averaged over 9 per cent since 2010, coupled with high retail lending rates between 12-16 per cent, are widely seen as reasons for the spending squeeze. Big-ticket sales were the worst hit. Car sales growth was down to just 2.19 per cent for the year, against 30 per cent in the year before.

Finance Minister Pranab Mukherjee said: “Among factors that contributed to the slowdown are a significant rise in the interest costs and weak global sentiments.”

Inflation is nibbling away at real wages while a slowdown in investments means there are fewer new jobs in the market, hitting both consumption and GDP numbers.

Prime Minister Manmohan Singh’s government has largely blamed factors beyond its control, such as the eurozone debt crisis, for its economic woes.

But many economists and investors have slammed the weak leadership and muddled policies that have failed to put a lid on government spending and alienated many foreign investors.

The big beef in industry has been over the policy paralysis in the government.

“This is a make-or-break situation for India and the government has to step on the panic button,” said Rupa Rege Nitsure, chief economist at the Bank of Baroda. “If the government doesn’t step in now, India’s sovereign ratings may be jeopardised.”

Last month, Standard & Poor’s cut India’s credit rating outlook to negative from stable and expressed worries over India’s fiscal and current account deficits. The decision jeopardises India’s long-term rating of BBB minus, the lowest investment grade rating. A cut in the rating will make it tough for Indian companies to borrow money overseas.

Said Confederation of Indian Industry (CII) director general Chandrajit Banerjee: “A comprehensive economic revival package has to be announced at the earliest.”

His counterpart at Ficci, economist Rajeev Kumar, cautioned that gross capital formation, or additions to the country’s stock of factories and machines, increased by 5.3 per cent during financial year 2011-12, compared to 11.1 per cent in the previous year. “This shows a grave crisis of investors’ confidence. We may be in danger of slipping in to a 1991-like crisis.”

In 1991, India had to pledge its gold to raise foreign exchange to pay off debts. While it may not be in such dire straits right now, Indian firms have to pay back some $137 billion this year itself to lenders at a time the country has a foreign exchange reserves of $290 billion, down from $308.5 billion in May 2011.

“Customers have been cautious with discretionary spending in times of uncertainty… a slowdown in growth added to inflationary pressure, impacting purchasing decisions,” said Kumar Rajagopalan, CEO of Retailers’ Association of India.

The slowdown in spending eerily resembles the situation in 2008-09 when the Lehman Brothers crashe led to a string of spectacular Wall Street crashes, impacting Indian exports and consumer sentiments.

“India needs to send a clear message to investors that the policy bias will be towards boosting growth,” said Samiran Chakraborty, head of research at Standard Chartered Plc in Mumbai.

The other big worry is over the legislative gridlock. All the big economic reforms — in areas like banking, insurance, pension, direct and indirect taxes, and a change in company laws — are snarled in the long-drawn-out parliamentary process.

Thursday’s nationwide strike to protest against the petrol price hike has only drawn attention to the perils the government faces in pushing through unpalatable reforms.

But the only way out for the country may well be for the government to risk the displeasure of its allies in pushing much-needed reforms to help revive the economy, bring value back to the rupee and put some gloss on the government’s battered image.