The global economy seems headed for another downturn after just three years. While parts of
euro area are headed for a recession, slowdown is evident in most other advanced economies
as well as emerging and developing economies. There has been a slowdown in growth in India
as well given the external conditions, dampened investment demand and high inflation. While
agriculture is so far the least impacted sector, the secondary and tertiary sectors have been
underperforming. Deceleration in mining and construction sectors that have extensive forward
linkages, continued volatility in production of capital goods and slowing activity in some services
are of significant concern.
Global growth headed for downturn again
as recession risks mount in euro area
I.1 Fiscal and financial uncertainty in the euro
area and the slower recovery in the advanced
economies (AEs) have compounded the risks
of a sharp downturn in the global economy, with
risk of a deep and prolonged recession in the
euro area. GDP growth rates in Q3 of 2011 in
the major AEs were stagnant or improved only
marginally (Chart I.1a). The US economy grew
at an annualised rate of 1.8 per cent (revised
downwards from the earlier estimate of 2.0 per
cent and first estimate of 2.5 per cent) in Q3 of
2011. Japan, though, showed some post-
Tsunami recovery and grew at an annualised
rate of 6.0 per cent in Q3, as against a decline
of 1.3 per cent in Q2 of 2011. During Q3 of
2011, euro area GDP grew by 0.5 per cent
quarter-on-quarter. Italy contracted, while Spain
recorded zero growth.
 |
I.2 Unemployment rates in the AEs have
persistently remained at high levels, though
there was some improvement in the US where
the unemployment rate dropped to a two and
half year low of 8.5 per cent in December 2011
(Chart I.1b). Unemployment rate in the euro
area is presently in double digits. With the
sovereign debt crisis forcing several European
countries to implement tough fiscal policies,
risks of further worsening of the economic cycle
in the region get accentuated.
I.3 Reflecting the knock on effects of the
contagion to the emerging and developing
economies (EDEs) China’s growth decelerated
for the third consecutive quarter in 2011 to 9.1
per cent in Q3 (y-o-y), the lowest in more than
two years. Brazil’s GDP growth decelerated to
2.1 per cent in Q3, compared with 3.3 per cent
in Q2.
Cooling emerging markets’ growth may
further dampen India’s external demand
I.4 EDEs, which were relatively insulated
from the global slowdown during H1 of 2011,
are now being subject to the effects of reduced
external demand as AEs’ export markets slump
(Chart I.2). Chinese export growth decelerated
to 13.8 per cent in November, with the overall
trade surplus declining 35 per cent over
November 2010. A credit crunch as a result of
worsening of the euro area sovereign debt crisis
could have implications for global trade as trade
finance may dry up, causing trade volumes to
fall more steeply. India has witnessed a
slowdown in export growth in Q4 of 2011 in
the wake of cooling external demand.
Merchandise exports grew less than 4 per cent
in November 2011.
Growth moderation in India significant
I.5 Growth in India is moderating on account
of large linkages of the manufacturing sector
with global demand, investment uncertainty and
high interest rates. GDP growth moderated for
the sixth consecutive quarter to 6.9 per cent in
Q2 of 2011-12, the lowest growth in the last
nine quarters (Table I.1). Momentum indicators,
as reflected by the q-o-q seasonally adjusted
annual growth rate (SAAR), have also shown a
decline since Q4 of 2009-10 (Chart I.3).
Table I.1: Sectoral GDP Growth (2004-05 prices) |
(Per cent) |
Item |
2009-10* |
2010-11# |
2010-11 |
2011-12 |
2010-11 |
2011-12 |
Q1 |
Q2 |
Q3 |
Q4 |
Q1 |
Q2 |
H1 |
H1 |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
9 |
10 |
11 |
1. Agriculture & allied activities |
0.4 |
6.6 |
2.4 |
5.4 |
9.9 |
7.5 |
3.9 |
3.2 |
3.7 |
3.6 |
2. Industry |
8.3 |
7.8 |
9.7 |
7.3 |
6.2 |
5.3 |
6.7 |
2.8 |
8.5 |
4.7 |
2.1 Mining & quarrying |
6.9 |
5.8 |
7.4 |
8.0 |
6.9 |
1.7 |
1.8 |
-2.9 |
7.7 |
-0.5 |
2.2 Manufacturing |
8.8 |
8.3 |
10.6 |
7.8 |
6.0 |
5.5 |
7.2 |
2.7 |
9.1 |
4.9 |
2.3 Electricity, gas & water supply |
6.4 |
5.7 |
5.5 |
2.8 |
6.4 |
7.8 |
7.9 |
9.8 |
4.1 |
8.9 |
3. Services |
9.7 |
9.2 |
10.1 |
9.2 |
8.6 |
8.6 |
8.9 |
8.7 |
9.6 |
8.8 |
3.1 Construction |
7.0 |
8.1 |
7.7 |
6.7 |
9.7 |
8.2 |
1.2 |
4.3 |
7.2 |
2.7 |
3.2 Trade, hotels, transport, storage & communication, etc. |
9.7 |
10.3 |
12.1 |
10.2 |
8.6 |
9.3 |
12.8 |
9.9 |
11.1 |
11.3 |
3.3 Financing, insurance, real estate & business services |
9.2 |
9.9 |
9.8 |
10.0 |
10.8 |
9.0 |
9.1 |
10.5 |
9.9 |
9.8 |
3.4 Community, social & personal services |
11.8 |
7.0 |
8.2 |
7.9 |
5.1 |
7.0 |
5.6 |
6.6 |
8.0 |
6.1 |
4. GDP at factor cost |
8.0 |
8.5 |
8.8 |
8.4 |
8.3 |
7.8 |
7.7 |
6.9 |
8.6 |
7.3 |
*: Quick Estimates. #: Revised Estimates.
Source: Central Statistics Office. |
 |
I.6 The deceleration in GDP growth in H1 of
2011-12 to 7.3 per cent from 8.6 per cent in the
previous year was driven by a decline in ‘mining
and quarrying’ and sharp moderation in
manufacturing sector growth, even as ‘electricity,
gas and water supply’ continued to gain
momentum. The services sector also moderated,
with the slack evident mainly in construction
and ‘community social and personal services’.
The growth rate of the agriculture sector,
however, remained steady during H1 of
2011-12.
I.7 The slack in both industrial and services
sectors is partly reflective of the inter-linkages
between the two sectors. However, in a downturn the services growth is likely to show
resilience relative to the industrial growth.
I.8 On the whole, the growth rate of GDP
remained below trend in H1 of 2011-12
(Chart I.4). The trend growth rate, which was
estimated around 8.5 per cent on an average
during 2005-06 to 2007-08, has dipped gradually
thereafter and is presently about 8.0 per cent,
indicating a structural decline in growth rate of
the economy vis-a-vis 2005-08.
I.9 The downside risks to growth in 2011-12
and the next year emanate from the possible
recession in the euro area, deceleration in export
growth in recent months, the lagged impact of
weak investment activity and uncertainty with
regard to availability of crucial inputs such as
coal.
Impact of dismal north-east monsoon
limited, agriculture growth likely to stay
around trend
I.10 As per the First Advance Estimates for
kharif 2011-12, production of foodgrains,
oilseeds, and other commercial crops, barring
pulses, was higher than the kharif output in
2010-11. This is significant given the record
production of these crops in the previous year.
In the final analysis, the performance of rabi
crops will determine the overall outcome for
the agriculture sector. The progress of rabi
sowing, so far in the season, has been satisfactory
(Table I.2). Late rains received during September
and October resulted in improved soil moisture
level which is favourable for rabi crops. The
water storage level in the major reservoirs,
though lower than last year, is at a comfortable
level. Although the below par performance of
the north-east monsoon thus far can have some
adverse impact on rabi production, the impact,
nonetheless, is expected to be limited.
Managing food stock and reforming
agriculture marketing
I.11 Foodgrain stocks continued to be higher
than the requirement under the quarterly buffer
norm and security reserve requirements
(Chart I.5). The proposed National Food
Security Bill (NFSB) has implications for the
food management operations. These operation
would need to be scaled up considerably, even
while the off-take of stocks could improve. Expanded coverage and entitlements, as
envisaged under the Bill, would warrant
increase in procurement. This would require
massive scaling up of storage facilities, which
are already stretched beyond their carrying
capacities, and other components of the delivery and distribution mechanism, including operation
costs.
Table I.2: Rabi Area Sown |
(Million hectares) |
Crop |
Sowing as on January 20 |
Normal Area |
2011 |
2012 |
Per cent of Normal 2012 |
1 |
2 |
3 |
4 |
5 |
Total Foodgrains |
50.7 |
51.0 |
51.0 |
100.6 |
of which |
|
|
(0.0) |
|
Wheat |
27.8 |
29.1 |
29.4 |
105.8 |
|
|
|
(1.0) |
|
Rice |
4.4 |
1.3 |
1.3 |
29.5 |
|
|
|
(0.0) |
|
Coarse Cereals |
6.3 |
5.9 |
5.8 |
92.1 |
|
|
|
(-1.7) |
|
Cereals |
38.5 |
36.4 |
36.5 |
94.8 |
|
|
|
(0.3) |
|
Total Pulses |
12.3 |
14.7 |
14.5 |
117.9 |
of which |
|
|
(-1.4) |
|
Gram |
7.6 |
9.3 |
8.9 |
117.1 |
Lentil |
1.4 |
1.6 |
1.6 |
114.3 |
Peas |
0.7 |
0.7 |
0.8 |
114.3 |
Urad |
0.7 |
0.8 |
0.9 |
128.6 |
Moong |
0.6 |
0.5 |
0.5 |
83.3 |
Total Oilseeds |
9.5 |
9.0 |
8.4 |
88.4 |
of which |
|
|
(-6.7) |
|
Rapeseed & Mustard |
6.4 |
7.1 |
6.5 |
101.6 |
Sunflower |
1.2 |
0.5 |
0.4 |
33.3 |
Groundnut |
0.9 |
0.7 |
0.7 |
77.8 |
All Crops |
60.2 |
60.1 |
59.4 |
98.7 |
|
|
|
(-1.2) |
|
Note : Figures in parentheses are percentage change over previous year.
Source : Ministry of Agriculture, Government of India. |
 |
I.12 Implementation of the provisions of the
model APMC Act, which provides for direct
purchase and marketing, contract farming and
setting up of markets in private and co-operative
sectors, is expected to facilitate better market
access to farmers, reduce transportation costs
and increase farmers’ income. 19 states/union
territories have amended their APMC Acts so
far. Faster implementation of the Act would
enable better supply chain management,
especially for perishable commodities such as
fruits and vegetables.
Industrial slack emerges as export and
domestic demand decelerate
I.13 With the slowdown in demand, both
domestic as well as external, the Index of
Industrial Production (IIP) growth moderated
during April-November 2011 (Table I.3).
Several factors have contributed to this
moderation. Contraction in mining, inter-alia,
reflects short-term impact of legal enforcements
towards better governance. Poor performance
of manufacturing underpins slack investment
demand in the face of excess capacities built
earlier and lower demand. Moderation in
consumption expenditure, especially in interestrate
sensitive commodities, underperformance
of the construction sector, hardening of interest
rates and global economic uncertainty are some
of the major factors behind the moderation in
industrial growth. There is strong co-movement between the domestic and global IIP series, with
a correlation coefficient of 0.72 for the period
April 2006 to October 2011 (Chart I.6).
Table I.3: Index of Industrial Production –
Sectoral and Use-Based Classification of Industries |
(Per cent) |
Industry Group |
Weight in
IIP |
Growth Rate |
Weighted Contribution# |
Apr-Mar
2010-11 |
Apr-Nov |
Apr-Mar
2010-11 |
Apr-Nov |
2010-11 |
2011-12 P |
2010-11 |
2011-12 P |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
Sectoral |
|
|
|
|
|
|
|
Mining |
14.2 |
5.2 |
7.0 |
-2.5 |
7.3 |
9.5 |
-7.4 |
Manufacturing |
75.5 |
9.0 |
9.0 |
4.1 |
86.7 |
85.5 |
85.5 |
Electricity |
10.3 |
5.5 |
4.5 |
9.5 |
5.9 |
4.9 |
21.8 |
Use-Based |
|
|
|
|
|
|
|
Basic Goods |
45.7 |
6.0 |
5.4 |
6.2 |
29.1 |
26.5 |
63.7 |
Capital Goods |
8.8 |
14.8 |
18.2 |
-1.0 |
25.2 |
29.5 |
-3.8 |
Intermediate Goods |
15.7 |
7.4 |
8.1 |
-0.3 |
12.5 |
13.6 |
-1.0 |
Consumer Goods (a+b) |
29.8 |
8.6 |
8.0 |
4.9 |
33.3 |
30.3 |
40.7 |
a) Consumer Durables |
8.5 |
14.2 |
14.6 |
5.3 |
24.0 |
24.3 |
20.4 |
b) Consumer Non-durables |
21.3 |
4.3 |
2.9 |
4.6 |
9.4 |
6.1 |
20.2 |
General |
100.0 |
8.2 |
8.4 |
3.8 |
100.0 |
100.0 |
100.0 |
P : Provisional # : Figures may not add up to 100 due to rounding off.
Source: Central Statistics Office. |
I.14 Manufacturing sector growth decelerated
to 4.1 per cent during April-November 2011
from 9.0 per cent during the corresponding
period last year, mainly on account of negative
growth in sub-sectors such as ‘textiles’,
‘chemicals and chemical products’, ‘machinery
and equipment not elsewhere classified’ and
‘wearing apparel, dressing and dyeing of fur’,
which account for about 30 per cent of the
weight in the manufacturing sector. High input and capital costs and uncertain global economic
outlook were the major factors constraining the
growth of the manufacturing sector during the
year.
 |
I.15 As per the use-based classification, growth
in all categories, except basic goods and
consumer non-durables, moderated. Contraction
of 1.0 per cent in capital goods output in April-
November 2011, relative to a healthy 18.2 per
cent expansion during the same period in 2010,
highlights the weakening of investment activity.
Also, the slowdown in the growth of consumer
durables signals dampening of consumer
demand.
I.16 The IIP witnessed a revival in growth to
5.9 per cent in November 2011 as against a
decline of 4.7 per cent in the previous month.
Robust growth in electricity generation and a
revival in manufacturing production were the
major drivers of IIP growth during the month.
Production in the mining sector continued to
contract. Use-based classification reveals that
the manufacturing growth was driven by strong
performance of the consumer goods and basic
goods sectors. Capital goods and intermediate
goods continued to under-perform. Excluding
capital goods, the overall IIP and the manufacturing output increased by 7.8 per cent
and 9.2 per cent, respectively (Chart I.7).
 |
I.17 Overall, the pace of manufacturing sector
growth remained uneven and highly concentrated
across the sub-sectors, with eight out of the
twenty two industry groups showing negative
growth during April-November 2011-12. The
top five manufacturing industries, with a
combined weight of around 23 per cent in
manufacturing, grew at 14.7 per cent,
contributing about 78 per cent to the overall
growth during April-November 2011-12
(Chart I.8).
Core industries crucial to reviving
industrial growth
I.18 The core sector performance at 6.8 per cent
in November 2011, was an improvement
compared to 3.7 per cent in November 2010. However, during April-November 2011 the
growth of core industries decelerated to 4.6 per
cent as compared with 5.6 per cent during the
corresponding period in 2010. The growth is
mainly supported by the robust performance of
electricity and steel sectors (Chart I.9). The
recent slowdown in production in crucial
infrastructure industries such as coal and natural
gas raises concerns about the sustainability of
industrial growth. The poor performance of coal
sector may be partly attributed to regulatory and
environmental issues and also excessive rainfall
during the current year in the regions with major
coalfields.
Capacity utilisation remains flat
I.19 The Order Books, Inventories and Capacity
Utilisation Survey (OBICUS) [http://www.rbi.org.in/OBICUS15] of the Reserve Bank for Q2 of 2011-12 shows significant growth in new
orders particularly in the case of basic metals,
food products, motor vehicles, textiles,
machinery & equipment and other non-metallic
mineral products.
I.20 During H1 of 2011-12, capacity utilisation
(CU) remained virtually flat and well below
the peak level achieved in Q4 of 2010-11
(Chart I.10).
I.21 Nonetheless, reflecting the slowdown in
production in infrastructure industries, most
sectors operated with excess capacity during
April-September 2011-12 with the exception of
petroleum refinery products (Table I.4).
Services sector growth moderates led by
weak construction and trade activity
I.22 The moderation in the services sector in
H1 of 2011-12 was largely due to the sharp
deceleration in the growth of the construction sector and ‘community, social and personal
services’. Services associated with trading
activity registered a lower growth in Q2 of
2011-12 as compared with Q1.
I.23 The various lead indicators of services
sector also point towards a weakening of
momentum with telecommunication, civil
aviation and construction industries registering
lower growth compared to the previous year
(Table I.5). This has been reinforced by credit
slowdown to these sectors largely reflecting risk
aversion by banks due to rising bad loans.
Table I.4: Capacity Utilisation in Core Sectors |
(Per cent) |
Sector |
2009-10 |
2010-11 |
2011-12* |
1 |
2 |
3 |
4 |
Finished Steel (SAIL+VSP+ Tata Steel) |
90.7 |
92.0 |
88.1 |
Cement |
82.0 |
76.0 |
72.0 |
Fertiliser |
93.6 |
94.5 |
93.7 |
Refinery Production-Petroleum |
107.4 |
109.3 |
110.7 |
Thermal Power |
77.7 |
75.1 |
71.2 |
*: Data pertain to April-September 2011.
Source: Capsule Report on Infrastructure Sector Performance, Ministry of Statistics and Programme Implementation, GoI. |
Upward trend in employment continues
I.24 The quarterly quick surveys of employment
situation conducted by the Labour Bureau in
select sectors of the economy indicate that
employment has increased in eight major
industries by 0.32 million during Q2 of 2011-
12. This was the highest increase in employment during the last one year. However, employment
generation is heavily concentrated in the IT/
BPO sector, which accounted for 64.8 per cent
of the increase in employment during Q2 of
2011-12 (Table I.6). Export-oriented units such
as textiles and handloom also registered an
increase in employment.
Table I.5: Indicators of Services
Sector Activity |
(Growth in per cent) |
Services Sector Indicators |
2008-09 |
2009-10 |
2010-11 |
Apr-
Nov
2010 |
Apr-
Nov
2011 |
1 |
2 |
3 |
4 |
5 |
6 |
Tourist arrivals |
-2.7 |
4.4 |
8.3 |
8.3# |
8.1# |
Cement |
7.2 |
10.5 |
4.5 |
5.3 |
4.3 |
Steel |
1.9 |
6.0 |
8.9 |
8.2 |
8.2 |
Railway revenue earning freight traffic |
4.9 |
6.6 |
3.8 |
3.3 |
4.1 |
Cell phone connections* |
80.9 |
47.3 |
18 |
26.7$ |
-42.9$ |
Cargo handled at major ports |
2.2 |
5.8 |
1.6 |
0.8 |
1.2 |
Civil aviation |
|
|
|
|
|
Domestic cargo Traffic |
-2.8 |
24.3 |
23.7 |
30.8$ |
-6.1$ |
International cargo Traffic |
0.3 |
10.5 |
17.7 |
23.9$ |
0.1$ |
International Passenger Traffic |
5.9 |
8.8 |
10.3 |
11.7$ |
7.8$ |
Domestic Passenger Traffic |
-11.2 |
15.6 |
18.1 |
16.8$ |
19.0$ |
#: Data pertain to April-December. $: Data pertain to April-October.
*: Data refers to wireless subscribers additions.
Source: Ministry of Tourism; Ministry of Statistics and Programme Implementation and CMIE. |
Growth outlook depends on global
conditions and domestic policy reforms
I.25 The economy registered below trend
growth in Q2 of 2011-12. The performance of
both industry and services sector was below par,
partly reflecting macro-factors that include
softening demand and loss of business
confidence due to fear of global downturn. This
also reflects micro-factors such as structural
impediments that require public policy to be
more supportive of business activity and
willingness of the business sectors to abide by
better corporate governance practices.
I.26 While growth is slowing down, some
recovery in Q4 of 2011-12 is likely. A deficient
north east monsoon so far notwithstanding, agriculture output is likely to be satisfactory in
2011-12. The data suggest continued slowdown
in industry, but the Purchasing Managers’ Index
(PMI) for December indicates strong expansion.
Industrial growth, including that in core
industries, rebounded in November 2011.
However, the rebound was supported by
seasonal spurt in consumer non-durables and
capital goods output that remain volatile on
month-to-month basis and so its sustainability
is unclear. As such, the dismal performance of
mining sector and several headwinds for the
manufacturing sector leave the timing of a
revival uncertain, though some recovery is
expected in Q4 of 2011-12.
Table I.6: Changes in Estimated Employment |
(in '000s) |
Industry/Group |
2010-
11 Q1 |
2010-
11 Q2 |
2010-
11 Q3 |
2010-
11 Q4 |
2011-
12 Q1 |
2011-
12 Q2 |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
1. Textiles including apparels |
-63 |
245 |
40 |
-121 |
-33 |
42 |
2. Leather |
21 |
4 |
16 |
-8 |
1 |
-2 |
3. Metals |
45 |
27 |
0 |
16 |
53 |
38 |
4. Automobiles |
51 |
29 |
18 |
13 |
18 |
22 |
5. Gems and jewellery |
4 |
4 |
-10 |
-2 |
13 |
7 |
6. Transport |
-21 |
13 |
-1 |
6 |
-2 |
-5 |
7. IT/BPO |
129 |
108 |
141 |
287 |
164 |
204 |
8. Handloom / Powerloom |
-4 |
6 |
3 |
-18 |
1 |
9 |
Overall |
162 |
435 |
207 |
174 |
215 |
315 |
Source: Twelfth Quarterly Quick Employment Survey, June 2011-Sept 2011, Labour Bureau. |
I.27 Several inter-linked micro-impediments to
industrial production need to be addressed
quickly. For instance, the underperformance of
the coal sector is affecting thermal power
generation. Services, which have a strong
correlation with the overall economic activity,
are also likely to stay downcast. The lower
global growth is another factor that portends
growth moderation in the domestic economy.
On the upside, as inflation decelerates, we could
see revival of demand and pick-up in momentum
of production activity. If inflation recedes, the
revival could be supported by monetary policy. |