Investment rate at nadir of 29.9%

Economic growth during the first quarter of this fiscal surpassed street expectations, coming in at 5.5%, sequentially higher than the previous quarter’s 5.3%, though the performance was the worst ever for this three-month period since the current series at 2004-05 prices came into vogue.

But this does not obscure the fact that the economy is enmeshed in a slowdown, as in the initial three months of both 2010-11 and 2011-12, the real GDP had spurted at an impressive 8.5% and 8%, respectively. The slide has persisted in the succeeding three quarters and the rebound now seen is too feeble to be vested with much significance.

The surprising element in the latest GDP numbers is the sharp deceleration in the incremental increase in the value added from the services sector – normally a buoyant segment of the economy – to 6.9% from a high of 10.2% in Q1 of 2011-12.

Within the tertiary segment, according to the Central Statistical Office, the setback was pronounced in the case of trade, hotels, transport and communications to 4% from 13.8%, while the growth rate had more than doubled to 7.9% in community, social and personal services.

The commodity-producing sectors of the economy had also proved to be laggards during the first quarter. The GDP originating from the primary sector had slowed down to 2.9% from the preceding year’s 3.7% and that from the secondary sector to 3.6% from 5.6%.

The pivotal manufacturing sub-sector had fared dismally with the growth rate at a measly 0.2% as against 7.3%, while the contribution of mining to GDP was virtually flat. But, construction was a bright spot, with the growth rate speeding to a high of 10.9% from 3.5%.

Despite the over 300 basis point-fall in the rate of growth in the tertiary sector during the first quarter of 2012-13 vis-à-vis the year ago, the share of this sector has now risen to almost 60% – up two percentage points over the short period of two years, with a corresponding decline of almost one percentage point in the primary and secondary sectors.

A disturbing fact thrown up by the GDP data is that investment slack is persisting and during the latest three months, the rate of gross fixed capital formation had plunged to a low of 29.9% – down from 31.2% last year and the lowest for this quarter since 2005-06. The recent peak of 33.8% was in 2008-09 and since then the trend was mixed with a downward bias.

On the price front, the tidings are positive though the inflation rate is rather high. As per the GDP deflator, in the first quarter of 2012-13, the GDP deflator stood at 7.7%, down from 9% a year ago. However, this comprehensive measure of inflation is fractionally higher than the headline inflation of 7.4% for this quarter. Thanks to this let-up in the inflation rate, the nominal GDP is estimated to have increased by only 13.5% compared with 17.7% in the preceding year.

The diversion of huge sums of money away from investment to wasteful expenditure in the purchase of gold, silver and other precious metals – described as “valuables” in national accounts parlance – in the wake of inflation in recent years, has slowed down appreciably in the first three months of the current year.

In absolute terms, the amount expended in valuables has declined by a whopping 42% to `39,239 crore now from `67,553 crore in the same period of last year, while the rate of valuables has dropped to 1.7% from 3.3%.

The ministry of commerce had stated that imports of gold and silver during the three months ending June 2013 had fallen by 47%. The CSO figures provide a confirmation of sorts for this welcome development. At a basic level, this lower order of unproductive spending may be a sequel to high prices of precious metals and the moderation in inflation seen in the economy.