Finance minister P Chidambaram, who astounded most when he managed to contain FY13’s fiscal deficit despite the dramatically lower GDP growth than originally projected, needs to pull out another rabbit from his hat in FY14. While growth targets are once again looking dicey, the bigger problem is that the growth collapse has taken place even while government expenditure has grown at its fastest in the last 7 quarters. Had government expenditure not risen by 10.5% in the quarter, Q1 GDP would have risen by just 3.7%, not the headline 4.4%. And the 4.4% itself, it is worth keeping in mind, was the worst in the last 16 quarters. Industrial production, if you look at the supply side, was down to a 17-quarter low and contracted 0.9% in Q1. In terms of the demand side, private consumption growth slowed to just 1.6%, the lowest in 33 quarters, which is when the new base was first used—given that even FMCG companies are seeing flat volumes, the number is ominous.
Investment continued to collapse, and contracted 1.2% in Q1, with few expecting it to pick up anytime soon. Even the Prime Minister, whose job it is to remain optimistic, said he expected the impact of the clearances given by the Cabinet Committee on Investments to start kicking in only in Q3FY14. Whether investment picks up, of course, depends on a lot of things. For one, with real interest rates at 9% (if you use the GDP deflator), interest costs are way too high. Two, with most of India Inc highly leveraged, it simply doesn’t have the wherewithal to fund aggressive expansion. A recent report by Credit Suisse, titled House of Debt Revisited, points to how several top infrastructure firms have an interest cover—EBIT to interest payments—of well under 1. Add to this, the government’s lethargy over clearing big oil/gas exploration projects of companies like Cairn and RIL-BP—indeed, in the case of RIL, the oil regulator has all but asked the company to leave its NEC25 fields which had a $3-4 billion capex plan, and the government continues to send out mixed signals on whether the higher Rangarajan-based price would be available to the company for a long time. And, as Axis Bank economists point out, there will be an inventory drag down in the next few quarters, so this will also lower the GDP growth impulse—as compared to an average 2.3% FY12 average, the