Inflation spawns a buying spree in valuables

In conformity with expectations, economic growth during April-June decelerated to 7.7% from 8.8% during the same quarter of 2010-11.

The performance has been largely service-sector led — with the real GDP originating here spurting by 10% — while the incremental increase in the commodity-producing sectors was down to 4.7% from last year’s 6.8%.

The surprising feature of the first quarter growth story was that, considering the high base of the previous year, the economy has been more resilient than anticipated; the underpinnings are still strong despite the increasingly hawkish monetary policy stance.

Indeed, with inflation at an elevated level, the latest news on the macroeconomic front may provide further ammunition to the Reserve Bank of India to administer more of the same medicine it has been doling out of late with a view to break the price spiral.

Reading between the lines, the official data clearly show that, during the initial quarter of 2011-12, both investment and consumption spending has slackened markedly but the expenditure in acquiring valuables has seen a phenomenal surge.

The increase in final consumption expenditure, at 15.5%, was much slower than the previous year’s 21.1%; in respect of gross fixed capital formation too, from 18.5%, the rise during the latest three months ended June 2011, worked out to 14.2%.

But, with inflation rates high and surging and amid general economic and political uncertainties, Indians, like their counterparts abroad too are seeking refuge in gold and other safe forms of investment as the best chaos hedge.

According to the Central Statistical Organisation, an expenditure of Rs40,779 crore in valuables has been incurred during the first quarter of 2010-11, marking a jump of 46.4% over the same period of the preceding fiscal.

This buying spree has continued with redoubled frenzy during the current year, with a further surge of 96.1% to Rs79,965 crore in the purchase of solid and safe assets.

In turn, this has also fuelled the respectable rate of increase in constant GDP in the latest quarter.

Since the last two years have been a period of raging inflation, the acquisition of valuables have provided a measure of security; no wonder then, that as between the first quarter of 2009-10 and 2011-12, the money expended in this avenue has leaped by a phenomenal 187%.

In striking contrast, final consumption spending had gone up by a mere 40% during this period and gross fixed capital formation by 35%. Inflation is not only a cruel tax, it also leads to distortion in expenditure. The latest GDP figures also help gauge the gravity of the price situation.

Based on the GDP deflator, the rise in prices during the first quarter of the current fiscal was of the order of 8.3%. Though this is rather high, it is not so high as portrayed by the wholesale price index - which rose by 9.4% during this quarter — or by the consumer price indeed for industrial workers — which had hardened by 8.9%.

Analysing the GDP numbers by broad sectors and subsectors, it is evident that, during the first quarter, the real income from the primary sector had increased by 3.9% from 2.4% last year but that from the secondary sector had slowed down to 5.1% from 9.1%.

However, the biggest shocker was the precipitous decline in the growth rate of real GDP emanating from the construction segment; from 7.7% a year ago, in the current year’s first quarter, it has eased to 1.2%.

CSO notes that, of the two key indicators of construction, cement production has declined by 0.9% in this quarter while the consumption of finished steel has gone up by 1.5%. This setback appears to be rather small in relation to the steep fall in the incremental growth of the construction segment. We must wait for full details to unravel how the under-performance in construction has come about.

As expected, both mining and manufacturing have fared poorly with tempo slowing to 1.8% and 7.2%, respectively, from their year ago levels. In the tertiary sector, barring community, social and personal services, the growth rate has been high in the remaining two segments, viz, trade, hotels, transport & communications and financing, insurance, real estate & business services.