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India GDP Growth-First Quarter Apr-Jun 2011-VRK100-31Aug2011

India GDP Growth-First Quarter Apr-Jun 2011-VRK100-31Aug2011

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What is the national income of India in April-June 2011 quarter? It is 4,542 tonnes of pure gold. This detailed article is written by Rama Krishna Vadlamudi, Hyderabad. It gives an overview of India's GDP growth rates and gives answers whether RBI will raise interest rates further.
What is the national income of India in April-June 2011 quarter? It is 4,542 tonnes of pure gold. This detailed article is written by Rama Krishna Vadlamudi, Hyderabad. It gives an overview of India's GDP growth rates and gives answers whether RBI will raise interest rates further.

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Published by: RamaKrishna Vadlamudi on Sep 01, 2011
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Rama Krishna Vadlamudi, HYDERABAD 31 August 2011
For quite some time, economists and market pundits have been telling that the Indianeconomy is in a slowdown. This has now been confirmed by the latest figures of GDPreleased by the Government of India. As per the data released on 30 August 2011, the first quarter (April-June 2011) GDP growth rate has come down to 7.7 per cent as against 9.3 per cent in the corresponding quarter of last year. However, the growth rate of April-June 2010quarter is revised down to 8.8 per cent from 9.3 per cent as per the new series of Index of  Industrial Production (IIP) with 2004-05 as base year.What is noteworthy is that the quarterly growth rate has been on a downward spiral since April-June 2010 quarter as the RBI has been increasing interest rates since March 2010.
It is now official that economic activity is slowing down. What is pulling down the economyis a sharp dip in the growth rate of construction sector to 1.2 per cent in the latest quartercompared to the 7.7 per cent growth rate in April-June 2010 quarter. Other sectors that havecontributed to the lower economic activity are: Mining and quarrying: 1.8 % (7.4%); andCommunity, social & personal services: 5.6 % (8.2%). The sectors that are doing better are:Agriculture, forestry & fishing: 3.9 % (2.4%); and Electricity, gas & water supply: 7.9%(5.5%). (Figures in brackets are for April-June 2010 quarter).Policymakers are usually in the habit of talking up the economy. Of course, it’s their job! Thecheerleaders say that the Indian economy will pick up pace in the second-half of the fiscalyear. However, as is well known, empirical evidence suggests otherwise. In the last sevenyears, second-half growth rate is lower than that of first-half growth rate in five years.Equity markets have taken the GDP figures in their stride and the reaction is muted except forthe negative effect on prices of Larsen & Toubro and others. Now, the markets are trying toguess what the RBI will do on September 16
th
when it meets for policy rate revision. Thereare two strong opinions about further rate hikes by RBI. One camp feels that RBI should notraise rates further as the economy is already slowing and the stubborn inflation is caused bysupply-side factors and other factors not connected with monetary measures. The secondviewpoint is that RBI will opt for a further 25 basis point (0.25%) increase as inflation is notshowing any signs of cooling down. My guesstimate is that RBI will go for a Repo rate hikeof 25 basis points on September 16
th
.
 
Rama Krishna Vadlamudi, HYDERABAD 31 August 2011
www.scribd.com/vrk100
MY BLOG: www.ramakrishnavadlamudi.blogspot.com 
Page 2 of 6
GDP Growth Rate Declining
The steady decline in growth rate is due to a variety of factors, the main being the relentlessraise of interest rates by Reserve Bank of India since March 2010. RBI’s hawkish monetarypolicy seems to be having the desired effect. Other factors contributing to the decline of GDPgrowth rates are: slowdown in investment cycle, policy-related issues such as, delays in landacquisition for new projects and environmental clearances. Major projects have been help upover the past few years.
GDP Quarterly growth rates %
9.49.38.98.37.87.7012345678910Q4: 2009-10Q1: 2010-11Q2: 2010-11Q3: 2010-11Q4: 2010-11Q1: 2011-12
 
Notes: Q1 2011-12 figure is based on new IIP series 2004-05 and other quarters are based on old IIP series 1999-2000.Q1 – 1
st
quarter (Apr-Jun), Q2 – 2
nd
quarter (Jul-Sep), Q3 – 3
rd
quarter (Oct-Dec), and Q4 – 4
th
quarter (Jan-Mar). Source: CSO
RBI’s Repo rate hikes
Reserve Bank of India has been increasing Repo rates (the main policy rate) since March2010. The Repo rate under RBI’s liquidity adjustment facility (LAF) has been raised by 325basis points in the last 18 months; with 125-bp hike coming in the last three months.
LAF-Repo rates %
5.005.255.505.756.006.256.506.757.257.508.000.001.002.003.004.005.006.007.008.009.00
  2  0  M  a  r .  1  0  2  0  A  p  r .  1  0  0  3  J  u  l .  1  0  2  7  J  u  l .  1  0  1  7  S e  p .  1  0  0  2  N  o  v .  1  0  2  5  J  a  n .  1  1  1  7  M  a  r .  1  1  0  3  M  a  y .  1  1  1  6  J  u  n .  1  1  2  6  J  u  l .  1  1
 
Source: RBI
 
Rama Krishna Vadlamudi, HYDERABAD 31 August 2011
www.scribd.com/vrk100
MY BLOG: www.ramakrishnavadlamudi.blogspot.com 
Page 3 of 6
Overheard!
(It is fashionable to converteverything into gold now
)
Investment cycle slowing down
Estimates based on the expenditure side of the GDP also point to a slowdown in growthrate. If one looks at the figures of gross fixed capital formation (GFCF), it is very clearthat the total investments made in the economy are tapering off. GFCF figure of Rs 4.11crore (at constant 2004-05 prices) for the first quarter shows a year-on-year growth of only 7.9 per cent against 11.1 per cent growth rate in the corresponding quarter of previous year. Other two indicators, private final consumption expenditure (PFCE) andgovernment final consumption expenditure (GFCE), are also pointing out the samedownward trend. (See below for some definitions)
Half-yearly GDP growth rates
Many economists and policymakers want us to believe that second-half (October-March)growth rate is greater than that of the first-half (April-September). Empirical evidencesuggests otherwise. Between 2004-05 and 2010-11, GDP growth rate in first-half (bluebar) was higher than that in the second-half (red bar) of the financial year in five out of seven years as can be seen from the graph below. Only in 2009-10 and 2005-06, second-half growth rates were higher than those of first-half. Of course, GDP in absolute terms istraditionally higher in the second-half compared to first-half.
Half-Yearly GDP Growth Rate %
7.89.09.99.17.87.59.17.210.09.68.95.88.48.10.02.04.06.08.010.012.02004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11H1 H2
 
Notes: H1 - April-September, and H2 – October to March. GDP at factor cost at constant prices (1999-2000) for years from 2004-05to 2008-09 and for years 2009-10 & 2010-11, figures are GDP at factor cost at constant prices (2004-05). Source: CSOQ: What is India’s national incomein 1
st
quarter of 2011-12?A: It is 4,542 tonnes of pure gold!

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