The Daily Reckoning by Bill Bonner
On This Day - 2 June 2012
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Decomposing the fall in GDP Growth A  A  A

- By Asad Dossani, Author, The Lucrative Derivative Report

Asad Dossani
This week, the Indian government released the figures for estimated GDP growth during January-March of this year. For the 8th quarter in a row, GDP growth has declined, and the latest figure has come in at 5.3%, a drop from 6.1% in the previous quarter. There is no doubt that this trend is worrying. So what exactly is the cause?

If we look at the growth rate of the various sectors in the economy, there were some stark differences. The best performing sector was services, witnessing growth rates ranging from 7%-10%. The worst performing sector was manufacturing, that witnessed a growth rate of -0.3%. It was the only sector to witness a contraction.

The manufacturing sector has been struggling for a variety of reasons. First, they have been hurt by high interest rates. The RBI has recently started lowering rates, and will likely continue to do so in light of continued weakness in the sector. Manufacturing has also been negatively affected due to a lack of economic reforms from the government.

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Another area of subdued growth has been exports. Export growth has been slowing down over the course of the year, and this has been a contributing factor to the fall in GDP growth. Slowing exports is largely a result of worsening economic sentiment in Europe and America. As the majority of Indian exports go to Western economies, a slowdown over there hurts us over here.

The question going forward is what can we do to increase growth. The fall in growth can be decomposed into domestic and foreign factors. If the Eurozone crisis gets worse and the US economy were to worsen, it is highly likely our GDP growth will continue to fall. Exports are a significant part of the economy, and the demand for exports is largely out of our control.

Domestically, there is a lot we can do to improve growth. The stark difference between the performance of the manufacturing and services sector is an indication that the manufacturing sector faces structural barriers to growth that the services sector does not.

Factors such as interest rates, government bureaucracy, corruption, and economic reforms, have a greater impact on the manufacturing sector relative to the services sector. A greater focus on removing the structural barriers to manufacturing growth would provide a much-needed boost to GDP growth.

is a financial analyst and columnist. He actively trades his own and others' funds, investing primarily in currency, commodity, and stock index derivative products. Prior to this, he worked at Deutsche Bank as an analyst in the FX derivatives team. He is a graduate of the London School of Economics. Asad is a keen observer of macroeconomic trends and their effects on global financial markets. He is deeply passionate about educating investors, and encouraging individuals to take part in and profit from financial markets. To put it colloquially, he wishes to take Wall Street products and turn them into Main Street profits!

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4 Responses to "Decomposing the fall in GDP Growth"
manoharkantak
Jun 5, 2012
If we think from abroad perspective, there are many factors that had driven our country to this situation. Economics and politics are two separate subjects. Those who do not know ABC of economics when they become politicians they think they are masters of economics. Those who know A to Z of economics do not want to implement economic policies, with the fear that they will lose their positions and power.Major part of taxes which Government has collected has been misused, in sense has been put for non productive use only to gain people's good will.If you do not make your child understand the importance of money, what will he do ? the same thing politicians have done. Like 
Rajeev
Jun 3, 2012
The recommendatiOn for the boost to Manufacturing by removing structural barriers, is good. However If exports slow down and Europe continues in tail spin, market for the manufactured goods become restricted. Hence it may be Pertinenet to differentiate between manufacturing companies focused or addressing the domestic consumption story and com Like 
RVRAO
Jun 3, 2012
what I am unable to understand is why the manufacturing sector is heavily depending on borrowed funds which now cost heavy interest rates.The corporates should increase their equity and other methods to finance thier operations and reduce their dependence on borrowed funds.
RVRao
Like 
NVS
Jun 3, 2012
Corruption is killing the economy. The govt is paralysed and does not take any meaningful decisions. The govt is also wasting public money in useless schemes in the name of inclusive growth. When there is no growth there can only be inclusive misery. What we need is not western solutions but domestic focus on stable prices and domestic investments to further growth. Like 
  
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