Fears are coming true; the economic growth is affected by investement slowdown. Latest trend on GDP growth for the quarter ending December 2011 indicates that the economy has registered slowest growth rate in the post Lehman period- of 6.1%. The much lower than expected performance is caused by weak investment scenario as manufacturing, mining and the industrial sector in general failed to sustain growth momentum. The lower third quarter (October- December 2011) figure is a setback for the government to realize the 6.9% target GDP growth rate for the fiscal year.
An important element of the quarterly data is that the manufacturing sector growth rate has fallen to a dismal figure of 0.4 % compared to the previous quarterly estimate of 2.7%. The manufacturing growth figure is uncharacteristic to an emerging economy like India. Obviously, the decline of growth rate of the investment centric manufacturing sector shows that high interest rate policy followed by the RBI was growth reversing.
Decline in investment is a macroeconomic policy failure. Both the government and the RBI should not continue their cold war on fiscal deficit-inflation nexus issue. Collectively, they should redeem the economy from the high interest rate regime to bring back investment to the stable levels.
The latest data is a challenge for the government in the preparation of the budget. This is because the figure is near to the slow down period of 2008-09 and hence the government should make extra efforts to reinstate growth momentum in the economy. This means that the government should make growth stimulating concessions and sacrifices to the economy even by compromising on fiscal deficit.