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The domestic investment story, which saved India post recession, is unravelling

Last week, the term "growth shock" was used to describe the unexpectedly low GDP growth of 5.3 per cent for the last quarter (January-March) of 2012. The consensus estimate by most analysts was that the last quarter would deliver more than 6 per cent growth, at the very least. As it turned out, the GDP growth came closer to 5 per cent, a number many economists regard as the upgraded Hindu rate of growth. Just to refresh memory, the original Hindu rate of growth, as described by the economist Raj Krishna, was about 3-3.5 per cent, which prevailed between 1950 and 1980. So getting close to the neo Hindu rate of growth (5 per cent), even if for a quarter, has some shock value. It is also a grim reminder that the "rising India" story cannot be taken for granted against the backdrop of global economic weakness.

Of course, the saving grace is we still managed to get a GDP growth of 6.5 per cent for the entire fiscal of 2011-12, even if the last quarter was the worst we had seen in many years. It was also interesting that Finance Minister Pranab Mukherjee chose to mention two specific reasons that might have contributed to the dramatic fall in the GDP growth of the last quarter. One, the RBI had kept interest rates too high for too long. Industry, especially small businesses, has been crying itself hoarse over the high cost of capital for some time. Fresh private investment virtually came to a halt as the cost of capital began to make the critical difference in the decision on making new investments.

The second reason cited by Mukherjee for the rapidly slowing growth is the lack of mining clearances. This is borne out by fresh data suggesting a 0.9 per cent negative growth in mining output in 2011-12. The only other time when mining output showed negative growth was in 1971, when it contracted by 6.9 per cent. How can you get reasonably high growth when mining output is declining? For coal, iron ore, aluminium, bauxite and copper are key industrial inputs.

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