Listing out a host of positives including “a visible buoyancy in the capital markets” and “the resurgence of growth in manufacturing sector,” the government on Monday exuded confidence that “moderate acceleration” in the rate of GDP expansion in the second half would take growth in 2012-13 to 5.7-5.9%. In its mid-year economic analysis tabled in Parliament, the finance ministry also predicated its forecast on an expected early softening of the Reserve Bank of India's monetary policy stance down the line, enabled by a likely further moderation in inflation from the fourth quarter and “benign” global commodity prices.
Despite the April-October fiscal deficit being 72% of what was estimated for the full fiscal year in the Budget, the ministry assessed that the deficit would be contained at 5.3% of the GDP in 2012-13, in line with the road map announced by finance minister P Chidambaram a few weeks ago. The main author of the piece of analysis, chief economic adviser Raghuram Rajan, however, slightly discounted the optimism later while speaking to media persons, where he said achieving the (revised) target would be a “tough task”.
Rajan stressed the need for “further steps” to boost growth including “a good, confidence-inducing Budget”, speeding up clearance for projects and more capital market reform measures.
Economists, independent of the government, acknowledged that the new official estimate of growth was far more realistic than the widely off-the-mark 7.6% made in the last Budget, but cautioned that even the current estimate could be some 200-300 basis points higher than what the growth rate would be this year. The economy grew at 5.4% in the first half.
The government's estimate that the economy may have bottomed out is bolstered by the “positive upturn in the business expectation index in October-December quarter, higher purchasing managers' index in November etc. (A low-base-enabled unexpected rise industrial production index by 8.2% in October and an eight-month low a wholesale inflation rate of 7.24% in November have been added to the assortment of data later).
However, there is a set of disconcerting data, which the ministry's analysis doesn't quite highlight. The growth in gross fixed capital formation in the first half, for instance, was less than a third of that in the corresponding period a year ago at 2.3%. Even private consumption expenditure growth was lower at 3.8% in H1 this year as against 4.7% in H1 last year. The high fiscal deficit is reflected in an increase in the growth of government consumption expenditure to 8.8% in H1 this year (6%).
The finance ministry said most services – particularly the trade, transport, communication and financial services being largely driven by the performance of real sectors – will also log better growth this year. It added a better rabi crop to offset the decline in agriculture production in kharif, but analysts point out that rabi output will be reflected in the GDP of first quarter of next fiscal.
Echoing the views expressed by Chidambaram last week, Rajan said the economy was already witnessing some “green shoots” and that going forward, growth would pick up on the back of increasing corporate profits. He acknowledged that combating fiscal deficit and paring current account deficit are big challenges for the government.
On fiscal consolidation, the report said a road map announced by the government on October 29, 2012, has considerably improved business expectations and perception of domestic and global investors, the report said.
The finance ministry expects inflation to moderate to 6.8-7.0% by March from 7.24% in November. “A further moderation in inflation, likely to commence from the fourth quarter of the current year, together with benign global commodity prices, will also facilitate softening of the monetary policy stance of RBI,” the report said, ahead of the RBI policy review on Tuesday.
Rajan acknowledged the government was worried about the large current account deficit (CAD), with exports having slowed down and imports being less elastic. CAD widened to 4.2% of GDP in 2011-12, up from 2.7% in 2010-11. The cumulative value of exports for the April-November 2012-13 period was $189.2 billion as against $201.18 billion, registering a 5.95% decline. The ministry said the diesel price hike has helped curb the CAD and asked for gold-based financial products to cut imports.
“However, given the present indications, it is expected that the trade deficit in the current year would not be significantly higher than what it was last year. Consequently, it is reasonable to expect that the current account deficit as a ratio of GDP would be lower than what it was in 2011-12,” the report said. The CAD is projected at 3.7% this fiscal.
Rajan said disinvestment has gathered pace with the successful NMDC share sale which raised Rs 5,980 crore. The government has so far raised Rs 6,914 crore through share sales in NMDC, Hindustan Copper and NBCC. Rajan also pointed to the importance of improving the corporate bond market as well as the ability of the equity market to finance infrastructure requirements.
On tax collection, he said low corporate profitability was impacting revenue realisation. “Corporate profit earnings are not growing at pace; it was growing in past. We hope we will start picking up once again and that should add buoyancy. (If) people are not making money as much as they were then clearly it is going to impinge on that kind of revenue,” he said.