By aggressively slashing expenditure, the government — keen as it is on fiscal consolidation — may have unwittingly delayed the bottoming out of an economy already hit hard by a broad-based slowdown. According to the advance estimate of the gross domestic product for 2013-14 released on Thursday, the growth is likely to be 5% this fiscal, which means the economic expansion in the second half would be a deeply disturbing 4.6% given the 5.4% growth in the first half.
Though it was clear that the economy was poised to expand at the lowest rate in a decade this fiscal, the data showed the slowdown has been worse than expected.
Even as Central Statistics Office data confirmed that a persistent stagnation in consumption and investment has stultified aggregate demand, the finance ministry remained optimistic and pinned hopes on “leading indicators having turned up” since November. It said the year might end on a better note and promised to be watchful and take steps to revive growth. Analysts reckon that the latest GDP estimate might increase pressure on the government to unveil a growth-oriented Budget.
RBI governor D Subbarao said Thursday’s data would be taken into account while framing monetary policy for its next review in March.
Subbarao added that the central bank was looking forward to the upcoming Budget to get a better sense of the government’s fiscal consolidation plans. The RBI had lowered its key policy rate for the first time in nine months on January 29 to 7.75%.
Prime Minister’s Economic Advisory Council chairman C Rangarajan told FE that the projected growth seems to be an “underestimate”. “The way in which growth is estimated depends upon the behaviour of the economy in the recent period. Since investment sentiment has certainly changed in the last few months, the growth rate in the last quarter may be higher (pushing up annual growth),” he said.
However, Reuters quoted a statistics ministry official as saying on Thursday that economic growth likely eased further to around 4.8% in the third quarter mainly as a result of deep cuts in government spending, The numbers are due on February 28, the day the Budget will be presented.
While recent reform measures like partial decontrol of diesel prices and the steps being taken to rev up investments in infrastructure have inspired Indian and domestic investors and reduced the threat of a sovereign rating downgrade, the debate over the economy’s structural bottlenecks have intensified after the latest GDP estimate. While the RBI had earlier said India’s growth potential has come down to around 7%, a senior International Monetary Fund official on Thursday said it would take India some tough decisions and several years before it can think of going back to a growth era of 8% and more, which was an easy walk through till a few years ago. The IMF had on Wednesday said India’s growth rate would drop to 5.4% this year.
The RBI in its outlook released on January 28 projected the GDP growth in 2012-13 to be 5.5%, while finance minister P Chidambaram had projected 5.7%.
Chidambaram, who has set for himself a target to reduce the Centre’s fiscal deficit to 5.3% for the current fiscal, had ordered spending cuts in welfare, defence and road projects. No wonder, according to the latest GDP estimate, growth in government expenditure is on track to moderate to about 4% in 2012-13 from 8.6% a year ago, while private consumption expansion has been forecast to halve to 4% in 2012-13 over the previous fiscal. Growth of gross fixed capital formation — a proxy for investment in the economy — is projected to fall to 2.48% in 2012-13 from 4.4% in 2011-12.
The CSO data showed that the economic slump could be deeper than anticipated, with across-the-board slowdown in sectors including agriculture, industry and services. Bond yields fell sharply on Thursday, in expectations of deep rate cuts from the RBI at its monetary policy review scheduled next month. The Stock markets largely ignored the GDP data, with the benchmark BSE Sensex ending down 0.30% at 19,580.32 points on Thursday. The government on Thursday successfully raised about Rs 11,400 crore through its disinvestment in NTPC — the largest stake sale in 2012-13. Analysts expect the government to contain the fiscal deficit at 5.3% by March-end, even as lower government spending could curb growth.
Growth in agriculture and allied activities has been pegged at 1.8% in 2012-13, compared with 3.6% 2011-12. Manufacturing growth is estimated at 1.9% in 2012-13, down from 2.7% in 2011-12. The finance, insurance, real estate & business services sectors are likely to grow by 8.6% in 2012-13, against 11.7% in 2011-12. Expansion in the construction sector is pegged at 5.9% in 2012-13, against 5.6% in 2011-12.
Kotak Mahindra Bank chief economist Indranil Pan said the lower GDP number was a largely a statistical quirk, as the previous year’s growth numbers have changed. “I don’t see too many changes in the the growth trajectory. The bond market is reacting too positively,” Pan said, adding that it could be the beginning of the economic turnaround story. Expansion in financial & insurance sectors indicate a slowdown, while construction numbers have also been weak, he said.
DK Joshi, chief economist, Crisil, had earlier said that he expected the RBI to cut rates by 75 basis points between now and March 2014.
The economic growth for 2011-12 was recently revised downwards to a nine-year low of 6.2% from the earlier estimate of 6.5%. The CSO also revised the growth rates for 2010-11 and 2009-10 to 9.3% and 8.2%, respectively, from 8.4% each earlier. There had been a sharp decline in the savings rate to an eight-year low of 30.8% of GDP in 2011-12 from 34% in the previous year and the fall in the investment rate to a three-year low of 35% from 36.8% in the previous year.