Dont expect any noteworthy upturn in investments in 2013-14

Written by DK Joshi | Updated: Feb 28 2013, 10:50am hrs
It is difficult not to be astonished by Indias growth journey over the last decade and the surprises it has sprung along the way. At the beginning of the decade when the mood was pretty depressed and GDP growth had fallen to 4.4% in 2002-03 not too many anticipated that the countrys GDP growth would spurt to near 9%, and that it would be sustained for five years. This surprise lift in GDP growth raised our stature in the global arena and murmurs that Indias growth would soon surpass that of China started getting louder. Understandably, our policymakers, too, were affected by this cheery sentiment, and many of them began to talk of raising the growth bar to 10%.

Then, in 2008, the global financial crisis happened and it reminded us that in an inter-connected world, Indias economic cycle is synchronised with that of other economies, and that it cannot avoid the short-term pain arising from a dip in the growth rate in advanced countries.

The slowdown in growth to 6.7% in 2008-09 depressed sentiment, which was reflected in growth expectations for 2009-10 and 2010-11. Only recently did revised Central Statistical Organisation (CSO) data reveal that the growth recovery during those two years was much higher than anticipated. GDP growth, in fact, returned to its pre-crisis level of 9.3% in 2010-11 over a healthy base of 8.6% in 2009-10. The slide in in GDP growth thereafter has been equally remarkable 6.2% in 2011-12 and a decadal low of 5% (CSOs advance estimates) in 2012-13.

From where we are currently perched, achieving over 6% growth in 2013-14 looks like a tall order to many. But if there is one lesson that has been learnt during the last decade, it is about the difficulty that policymakers and market participants face in anticipating the turnaround of the economy and also its speed. Growth forecasts are heavily influenced by the macroeconomic environment prevailing at the time when the forecasts are made. We typically overestimate the growth potential during an upturn and underestimate it during a downturn.

So, do we today run the risk of underestimating growth prospects given the anemic growth rates and depressed sentiments

Not really, despite the sobering experience of the past decade. The situation today is fundamentally different from the early 2000s as well as during the aftermath of the global crisis, for two reasons. Firstly, although the tail risks have reduced in Europe, and China and US have improved somewhat, global factors are still far from favourable. By contrast, the global economy was booming during the mid-2000s. Secondly, the growth upturn during 2004-2008 was led by private investments, which were expanding at over 40% per year in nominal terms and 33% per year in real terms.

But nominal private corporate investments fell 13% in 2011-12 and we expect them to fall by another 35% in 2012-13. We do not expect any noteworthy upturn in investments in 2013-14 either, as the private investment pipeline has been impaired and will recover only when a favourable investment climate is recreated and maintained. Unlike 2009-10 and 2010-11, there is also no leeway with fiscal policy to directly support growth via increased spending. On the contrary, deficit control will involve tough decisions on the expenditure front, in the absence of revenue buoyancy from strong growth.

Crisil expects the economy to expand by 6.4% in 2013-14. Monetary policy will provide some support to growth. But, we expect no more than a 50-75 percentage points cut in repo rate in the rest of 2013 as inflation continues to be quite high. Under the assumption of normal monsoons, agriculture GDP will grow at an above-trend rate of 3.5 per cent over a weak base.

Beyond 2013-14, revival of growth critically hinges on a rebound in private corporate investments. And, the surprise may well come on this front. A few, far-reaching and innovative proposals in the Budget to revive private sector investments, and more follow-up measures to remove existing hurdles to project implementation may well lead to a surprising turnaround in the overall gloomy corporate mood and create the right climate for a surprise upside to our growth outlook.

There is a precedent to this, circa July 1991. The corporate and fiscal climate was pretty much dire then as well and, then as well as now, the principal actors, surprisingly, remain the same. This looks like a very low probability event at this juncture. Well, the turning points in the economy are difficult to predict. Thus notes the Economic Survey 2012-13 while forecasting a broad range of 6.1-6.7% GDP growth for 2013-14.