To the young and experienced, both anxious to see growth recover quickly, we would caution upfront that the economy may not have seen the worst as yet. GDP growth could well be lower than forecasts and even slip below 4% in 2014-15. Lead indicators like industrial growth, exports and credit off-take continue to signal no turnaround as yet. But what is even more worrying is that the sources for growth are running dry. Although not betting for a sub-4% outcome, the sheer vacuum in growth drivers within the broad economic context suggests growth could decelerate further south from its current levels, rather than upward as predicted.
Consider the GDP forecasts: RBI, the IMF and market analysts are all cautiously optimistic and expect growth to lift above 5% in 2014-15. What is noteworthy, however, is the consistency with which initially optimistic forecasts have been revised downwards a few times as each year unfolded since 2011-12actual growth outcomes have systematically fallen below initial forecasts for last three years, as the accompanying graph shows. Why has this been so
The answer is a straightforward one: assumptions about sources of growth have failed to materialise in varying degrees each successive year. The most recent example is RBIs initial forecast for 2013-14, and its subsequent revisions down the line. The year itself began with a 5.7% growth forecast by the central bank in May 2013; this was predicated upon a normal monsoon and the related boost to rural demand. As growth began to falter notwithstanding a bountiful monsoon, RBI supplemented its growth outlook with two additional sources of growthexport recovery in response to sharp currency depreciation in the second half of the year and a pick-up in private investment from infrastructure projects cleared by the government towards the last quarter. As we well know by now, these additional sources failed to measure up to expectations.
And so we draw the readers attention to two of RBIs growth fan charts. The first in its July 30 review for 2013-14 and the second in the recent, April 1, statement for 2014-15. Both are near-replicaswith a central forecast of around 5.5%tempting us to ask where the growth drivers for the current year are.
How realistic is the faith in an export rebound Would stalled projects revive as monetary tightening intensifies How much, and for how long can macroeconomic policies substitute as structural reforms are delayed or postponed Lets examine each concern.
A large chunk of growth optimism for 2014-15 is based on tapping external demand to substitute for weak domestic demand conditions. The presumption that a weakened currency and reviving global growth would propel exports has, however, proven short-lived so far with exports turning negative in the last few months. Analysts have struggled to figure out why exports failed to pick-up, but doubts are being raised if we are competitive enough in a world in which competing emerging market currencies have depreciated equally sharply.
Moreover, the prospect for a quick export turnaround appears dimmer as new facts emerge about the changing structure of global demand. Advanced economies growth is now more export-led, with the IMF predicting a strong rebound from 2.3% in 2013 to 4.2% this year; on the other hand, their appetite for buying goods from emerging market economies will grow more slowly at 3.5%. By contrast, exports from the emerging and developing countries bloc (EMDCs) are scaled down by the IMF (-0.4%); these will now see a more modest rise to 5% in 2014 from 4.4% last year.
On the domestic side, a lot of hope is pinned upon the revival of stalled projects. As more information and analysis emerges however, we now know that a large chunk of projects cleared by the Cabinet Committee on Investment (CCI) are still stuck at state government levels, radiating pessimism all around. Revival of private-sector investment is also constrained by high corporate debt, with high interest rates compounding the distress. Many firms, especially in infrastructure, are over-leveraged and are still selling assets to consolidate balance-sheets and recoup profitability. The public-private partnership model itself is riddled with problems and intensive scrutiny. Banks are stretched from high levels of bad assets; bunched in the infrastructure segment, they have turned risk-averse. Unsurprising, then, that credit growth remains subdued while industrial production is still trending negative.
If there are no growth drivers, the downside risks will soon magnify. If early apprehensions about El Nino turn out to be real, we will lose another source which contributed significantly to growth last year. Eventual growth outcome could therefore surprise on the down side, contrary to the currently prevailing optimism about 5.5%.
Further, there is little reason to believe that growth drivers could suddenly emerge down the line. Such conditions could even persist into the following year as the economy gets sucked into a spiral of structural decline.
Choices to revive the investment cycle narrow down to two broad categories: Policy stimulus to impart further short-term impulse or structural reforms to augment productive potential for a lasting boost to growth. It is important to recognise that macroeconomic policies cannot substitute indefinitely as growth drivers, other than in the short-term. Nor can policymakers afford to lower their guard on fiscal consolidation and monetary tightening in the short- to medium-term; any slippage could raise uncertainty. The faltering nature of growth in recent years should be seriously recognised for what it portends: That structural reform has to be the way forward if we sincerely want to revive growth and ward off staring at a
Hindu Rate of Growth!
The author is a New Delhi-based macroeconomist