Despite high govt spend, GDP growth at 4-yr low

Written by fe Bureau | New Delhi | Updated: Aug 31 2013, 06:10am hrs
The economy grew a dismal 4.4% in the June quarter the slowest quarterly expansion in four years and below analysts consensus as manufacturing and mining contracted, shaking even the most optimistic commentator of Indias economic potential. Aggregate demand remained subdued in the first quarter, with all its components government and private consumption and investments recording lower annual growth rates than the three months through March, according to data released by the Central Statistics Office on Friday.

Still, Prime Minister Manmohan Singh predicted a 5.5% expansion in FY14 in a speech in Parliament, against the decades low of 5% in the last fiscal. He also stressed the need for more difficult reforms like reduction of subsidies, insurance and pension sector reforms, eliminating bureaucratic red tape and implementing goods and services tax.

Economic affairs secretary Arvind Mayaram told FE enhanced government spending in the first quarter will take some time to feed through the economy and results will be clear by the second or the third quarter. In the first quarter for the current fiscal, we have released almost 48% to 50% of Plan expenditure of the total year. The impact of this will be felt only in the second or third quarter onwards because that much time it takes for transmission. Secondly, look at all the approvals given by CCI (Cabinet Committee on Investment). Approvals given between January and April (point at investments of) $27 billion. These are huge projects which will have a mobilisation time of six to seven months, so there again the impact of expenditure will be felt, he said.

Many analysts, however, were not as sanguine while industry bodies feared investment sentiments continued to remain low. ZyFin senior advisor Surjit Bhalla said GDP growth at 4.4% and inflation at 5.8% were figures indicative of an economy in trouble, in crisis. The silver lining, he said, was the low GDP inflation rate. The Consumer Price Index for the last few years has been overstating inflation by 3 to 4 percentage points, he said, adding it was time authorities recognised that a necessary condition for growth recovery is significantly lower real interest rates.

"There could hardly be any economic revival in the current fiscal as investment activities and manufacturing have collapsed. Maybe the second half will be better than the first half of this fiscal. However, we are in the process of revising our growth forecast for the entire fiscal from 5.5% as we now see significant downward risk to our earlier projection," said DK Joshi, chief economist at Crisil.

"While industrial production continues to remain weak, the surprise element in the GDP data was that some segments of the services sector havent done well. Maybe in the third quarter a little recovery may take place, considering that the monsoon is normal and a good farm harvest is expected. So I expect some rural disposable income to be devoted towards consumer spending third quarter onwards instead of gold after the government crackdown on the precious metal," said Madan Sabnavis, chief economist at CARE Ratings.

The mining sector, which reported a 2.8% decline in output in in the first quarter of 2013-14, compared with a growth of 3.1% in the previous quarter, was a big disappointment. With the utilities sectors also faring badly, key inputs remained expensive and in short supply. A steep 1.2% slump in manufacturing from 2.6% growth in the previous quarter and a subdued 3.7% expansion in electricity sector reinforced fears about industrial production. A somewhat steep fall in the growth of construction and trade, hotels, transport and communications to 2.8% and 3.9% in the first quarter from 4.4% and 6.2%, respectively, also pointed to the fact that the services sector worsened the woes for the economy as it failed to offset the damage done by the industrial segments.

At 11.5%, the slump in the gross fixed capital formation a gauge for investment in the first quarter of the current fiscal from the previous quarter is much worse than the sequential growth of 2.8% in the March quarter. The rate is even worse than the 3.5% rise in the entire crisis year of 2008-09 and 4.4% in 2011-12, showed the CSO data.

The mining sector contracted by 0.6% in 2012-13, the same as 2011-12, hurt by curbs on iron ore mining in Karnataka, Goa and Orissa and stagnant coal production. Iron ore exports dropped to less than a third in 2012-13, while coal imports are rising at 25% annually to bridge a domestic shortfall. The situation aggravated in the March quarter as mining contracted by 3.1%, compared with a 5.2% expansion a year before.

Private final consumption expenditure dropped 1.9% in the June quarter from the quarter before, while government final consumption expenditure dropped 6% in the first quarter of this fiscal from the previous quarter.

We do not wish to sound alarmist, as there are enough panic reactions visible around us, particularly on the rupee, but the concern on the economy can hardly be overstated, said Confederation of Indian Industry director general Chandrajit Banerjee. "There are no visible signs of an investment pick-up as investor sentiments continue to be very low. A weak rupee, tight liquidity, high cost of funds, procedural delays, etc, are all coming in the way of an investment revival," the investment chamber said.

We need to pursue a longer goal of making India more investor-friendly, taking steps like rolling out GST, working on removing regulatory hassles. In fact, with the PM reiterating today on the need to focus on these difficult reforms, we hope that these steps would soon be expedited, said Ficci president Naina Lal Kidwai.