GDP growth at 5% not surprising

In recent times, macro-numbers have surprised both on the upside and downside. First, it was the current account deficit (CAD) at 5.4% of GDP (Q2FY13) that surprised on the downside. Next, the inflation numbers for December 2012 at 7.2% was a positive surprise. However, the advance GDP numbers for FY13 at 5% has now surprised nearly all independent estimates, including the revised RBI estimate of 5.5%. What is more surprising is that that this 5% growth rate will be a full 2.6% lower than the initial PMEAC estimates for the current fiscal, at 7.6% (subsequently revised to 6.7%). This trend is reminiscent of the revised estimates for FY12 at 6.2%, significantly lower than the first PMEAC estimates of 9.0%!

A closer look at the Table 1 shows that, contrary to earlier belief, growth may not have bottomed out yet in the current fiscal. Based on a first-half growth of 5.4% and advance estimates for FY13 at 5%, the growth rate for the second half is estimated at 4.6%. The growth rate in the services sector has almost collapsed and is projected to be only 6.6% in the current fiscal. Nearly all sub-components of the services sector are slowing signs of a significant downturn. Notably, the so-called resilience of the services sector may have now been overdone. For example, more than half of the service sub-sectors may be regarded as endogenous/derived (where growth depends on economic activity in other sectors). Among these sectors are: trade, hotels & restaurants, transport by other means, storage, and other services. These sectors account for nearly 30% of GDP and there is a discernible slowdown. Take, for example, the communication sector, accounting for 4.0% of GDP. It may have grown at single digits in the current fiscal (detailed break-up is not available yet). This rate is much lower than the 26% annual growth the sector achieved during FY06-11. Yet another example is the banking and insurance sector, which accounts for 8.3% of GDP. It grew at 15.5% during FY06-11. In the current fiscal, this will again be in single digits. The continuing financial crisis in the western world has added to these woes. Possibly, value-added in finance is not growing as fast as before, and this is true for India as well.

As far as the manufacturing sector is concerned, the growth rate in the entire fiscal is projected to be better than the first half (1.9% vis-?-vis 0.5%). Curiously, there is a dissonance in manufacturing growth figures as far as IIP & CSO numbers are concerned. For example, manufacturing growth in the first half of the current fiscal as per IIP, was a de-growth of 0.4%. As per CSO, the manufacturing sector expanded at 0.5%. For the construction sector, which accounts for roughly 8% of GDP, the growth rate is projected at 5.9%, considerably lower than that in FY06-11 when it was 9% per year.

GDP expenditures at market prices show an even sharper deceleration of 7.2% in FY13 over FY11 (see Table 2). Consumption and investment growth seems to have almost collapsed in FY13 (difficult to reconcile the discrepancies, though). A difficult external environment has only compounded this.

Clearly, the GDP growth numbers for FY13 underline the need for some structural reforms on a priority basis. The government has already initiated bold steps in this regard and it needs to be continued in earnest. For example, on fiscal consolidation, the roadmap suggests a fiscal deficit at 4.8% for FY14 and the government must seriously try to adhere to it (it is most likely that the budgeted fiscal deficit for FY14 could be set even lower in the forthcoming budget). The National Manufacturing Policy sets the framework for the revitalisation of the manufacturing sector in the country. The idea of National Manufacturing and Investment Zones is sound and it may now be the right time to move ahead with its implementation.

Import elasticity of our growth has been high and we need to consider market-oriented reforms that can bring this elasticity lower. Oil and other fossil fuel, including coal, represent a large portion of our burgeoning imports. Proper pricing of fuel can help in moderating this demand. The government has already initiated steps and this needs to be taken forward with gusto. Over time, we would have to rely on renewable energy (in particular, solar) to a much greater extent. This should be scaled-up massively.

In the end, let us hope that the economy recovers to a higher growth trajectory in FY14, as this will be indispensable given the fact that the country needs to generate about 10 million jobs each year to absorb the growing workforce.

The author is Director, Economics & Research, FICCI. Views are personal

GDP growth at 5% not surprising

Contrary to earlier belief, growth may not have bottomed out yet in the current fiscal. The growth rate in the services sector, for example, has almost collapsed, and the manufacturing sector?s growth numbers, though projected to be higher, suffer from discrepancies.