Indian economy in
worsening straits By Kunal Kumar Kundu
On February 7, India's Central Statistical
Organization (CSO) released its advance estimate
of India's national income for 2012-13. Coming
from a government agency, it was a shocker, as it
now expects India's income side gross domestic
product (or GDP at factor cost, ie GDPfc) to grow
by a mere 5%, much lower than the market
expectation of 5.5% and
among the lowest ever expected
for the current and the least over the past 10
years.
Source:
RBI, MOSPI
What this means is that the
second half of the financial year that ends in
March 2013 will see the growth rate come down to
approximately 4.6%, down from 5.4% during the
first half.
In sectoral terms, agriculture
growth is likely to have plummeted to 1.8%
compared with 3.6% in the previous financial year.
This is not a surprise given the impact of
drought. Growth rate of industry as a whole is
expected to be 2%, down from 2.7% recorded a year
earlier. This was mainly because of a sharp
deceleration of manufacturing which is likely to
have grown by 1.9%, compared with 2.7% during
FY12. This is not entirely unexpected given the
evidence of sharp demand destruction that has
taken place. Also mining, which contracted during
FY12 (-0.6%), seems to have barely managed to grow
(0.4%).
It was the performance of the
services sector, however, that is a major cause
for concern. As per the advance estimate, the
service sector (which accounts for about 67% of
the GDP) growth rate may have slipped to as low as
6.5% (the lowest in 12 years) as against 7.9%
growth during FY12. Even this low growth got a
boost by a possible 6.8% rise in community and
social services (6% in FY12) as the government's
social sector expenditure is seemingly on the
rise.
With domestic demand falling, the
expenditure side GDP (or GDP at market price or
GDPmp) is expected to have grown by a mere 3.3% in
FY13, virtually half the growth rate of FY12
(6.3%). The persistent slowdown in investment is
reflected in the likely sharp fall in growth rate
of Gross Fixed Capital Formation (GFCF) to 2.5%
from 4.4% in FY12.
Source: RBI, MOSPI
Clearly, the
slowdown in investment spending has gathered
momentum that cannot be reversed easily. By March
this year, India's 12th Five Year Plan will
complete its first anniversary without any
perceptible increase in government spending on
infrastructure. Given the pressure on finances and
the tendency of every government to cut down on
capital expenditure every time the deficit
situation becomes unmanageable, public spending on
infrastructure will likely lag behind. With
private investment not materializing, this will
prevent the economy from growing faster going
forward.
However, the advance estimate
data may yet be suspect, given the sharp
difference between GDPfc and GDPmp. At 1.6%, this
is the second-highest difference in the growth
rate between these two measures. The government as
well as some analysts believes that the advance
estimate is biased on the downside as it fails to
reflect some recent uptick in activity. To an
extent, they maybe correct.
In fact, the
FY12 advance estimate pegged the GDP growth rate
to 6.9%, having failed to reflect the falling
level of activity then. The growth rate was
subsequently revised downward to 6.5% (after the
full-year data was first released) and
subsequently to 6.2% during the first revised
estimate released last week.
Therefore,
while there is some merit in the argument, the
possible upward revision may not be as high as
5.5% as the government is expecting because the
advance estimate does not take into account the
possible compression of government expenditure
that India's finance minister has recently
announced, faced as he is with the stark reality
of a high and rising fiscal deficit. Hence, the
expected 6.8% growth in social sector may yet be
lower.
Also, with the December 2012
industrial production data showing yet another
contraction (down by 0.6%) following a 0.8%
contraction in November, the government's optimism
of uptick seems to be unwarranted.
This
data also confirms that, like last year, the high
twin deficit (fiscal deficit and current account
deficit) will continue to challenge India. While
subsidies continues to rise, lower demand (both
domestic and external) has impacted collection of
indirect tax.
As a result, total indirect
tax (net of subsidies) is estimated to have
contracted by nearly 19% this year, the
second-highest contraction ever, following a
contraction of 27.3% during 2008-09, when India
embarked on a fiscal stimulation drive (reducing
rates of indirect taxes while continuing to spend
heavily on social sector) to perk up the economy
after the global crisis blew up.
India's
fiscal deficit, therefore, is unlikely to remain
contained within the revised target of 5.3% of
GDP, as GDP itself is likely to be lower than
expected while some proposed spending cuts might
not materialize.
The bigger threat, of
course is the current account deficit (CAD).
Reserve Bank of India data show that for the
quarter ending September, the current account
deficit touched US$22.3 billion (amounting to 5.4%
of GDP, the highest recorded), up from US$16.4
billion the quarter before.
This has been
caused by sharp deterioration in trade balance
despite falling imports as exports contracted even
sharper. If the monthly trade balance data is any
indicator, the deficit will likely be even higher
during the December ending quarter.
Another worrying aspect is the likely fall
in the savings rate.
Source: RBI, MOSPI
As per the
available data, the savings rate during FY12 fell
to 30.8% of GDP from 34% the year before. During
the current year, given that private domestic
consumption increased by 4.1% (albeit at the
slowest pace since FY03) as compared to FY12 in
the face of persistently high inflation, the
savings rate might well drop below 30% of GDP
during the current year.
In simple
economic terms, current account deficit goes up if
an economy invests more than what it saves
domestically. For India, the deficit has been
rising despite falling investment since savings
has fallen even further, resulting in rising CAD.
Note: RHS - Right Hand
side. Source: RBI
The advance
estimate, therefore, portends ominous signal.
While the economy may have bottomed out, faster
rebound ought not to be expected.
Kunal Kumar
Kundu is a New Delhi based economist.
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