In the second quarter of this fiscal—July to September 2011—the growth rate of GDP in India dipped to 6.9%. It was not unexpected. The slowdown in investment activity, especially in new projects as compared to the last two quarters, brought it about. It is however only the first sharp visible decline in the economy. The next quarter may be bleaker. The growth rate of GDP may then fall to 6 to 6.5%. Exports constitute one of the factors behind GDP growth. The world economy is in poor shape and as a result India’s exports may dwindle in value and volume. That may lead to a further decline in the GDP growth rate. The growth has gone down in a number of sectors, especially manufacturing. Mining output is less than last year’s. Such reports in India augur ill as the Euro zone is in deep trouble. All this will not pull the inflation rate down. Inflationary expectations remain high in India and there may be stagflation which means that if GDP growth is say 5%, inflation rate may be 10%. Month-on-month inflation data about various price indicators suggest that inflation in the country will go up unless there is some unexpected development.
It is a mistake to ascribe the fall in the GDP growth rate to an increase in real interest rates. Real interest rates in India have been near zero or negative. The real reasons for the dismal decline in GDP are global uncertainty, faulty governance and policy by the Indian government and the sharpening risk factor in investment. The investment climate generally has become unfavourable. The idea that RBI’s tight monetary policy has caused the decline can only lead to stagflation. The Central Bank can do little about growth and apprehensions about its policy may only cripple its effort to contain inflation.
