Riddle of the 5.3 per cent

By all accounts, last quarter was a perfect storm. Agricultural output fell because of weak monsoons, exports were battered as global growth slowed even further, the government was forced to strangle spending to limit the rise in fiscal deficit, and investment continued to languish.

So it was a relief that growth fell only to 5.3 per cent from 5.5 per cent in the previous quarter. But the year-on-year growth prints are obfuscated by base-year effects, that is, by what happened in the same quarter last year. A purer measure of the growth momentum is sequential quarter-on-quarter growth. And this shows that growth slipped to nearly 4 per cent, with both agriculture and industry growth turning negative.

On a sequential basis, overall growth has probably bottomed in the current quarter. Most high-frequency indicators, such as the purchasing managers index, suggest that. However, the pick-up will be modest as the full impact of the sub-par monsoons will show up this quarter, the government will need to curb spending even further, and global growth will probably continue to languish. But the turnaround, however modest, won't show up in the year-on-year growth rate, which, given the high base of last year, will actually slow further. Sadly, this is yet to be internalised by the market or the authorities.

The story of how we got here from 9 per cent growth is now pretty familiar. As the global economy slowed over the last three years, the government reacted by washing their hands of any reforms, refusing to withdraw the 2008-09 fiscal stimulus, letting loose a regime of regulatory uncertainty that choked off investment, and blaming Greece for all its woes. Added to that was the monetary authority's late reaction to rising inflation, which meant that by the time monetary policy was tightened, high inflation expectations had already become entrenched. All this came to a head late last year as the rising current account deficit, created almost entirely by the fiscal deficit, unnerved foreign investors, sparking off one of the worst episodes of rupee depreciation.

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