In February last year, the Prime Minister’s Economic Advisory Council pegged GDP growth for 2011-12 as high as 9%. In July 2011, they revised it down to 8.2%. Now, they estimate GDP growth this fiscal will be 7.1%. So when they say the economy will grow by 7.6% in 2013, keep their track record in mind.
Where did they go wrong? Well, in July last year, they assumed growth in gross domestic capital formation (fixed capital only) would be 13.7% this fiscal. They’ve revised that estimate down to 5.6%. Growth in final consumption, earlier estimated at 7.7%, has now been revised down to 6%.
What makes them think growth will be higher next year? The report gives three reasons: exports should do better, because of a weaker currency; consumption should pick up because of price stability and investment should do better because “The Council feels that with a return of price stability, appropriate supportive policy and administrative measures, it is possible to visualize an improvement in the investment rate, notwithstanding difficult conditions in the international financial markets.” Notice the emphasis on supportive policy, which includes the injunction that it must be ‘ incontestably demonstrated’ that government finances are on the path of fiscal consolidation.
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But leaving aside homilies, what are the numbers for 2012-13? GDCF in fixed capital is projected to grow at 9% from the current year’s 5.6%. Most of the heavy lifting is expected to be done by the private corporate sector, whose addition to fixed capital is projected to rise by 10%, from 3.8% in the current fiscal. Consumption, on the other hand, is expected to grow by 6.7%, after the current fiscal’s 6% growth.
The increase in capex seems reasonable, given the fact that we’ve had four years of very low growth. But everything depends on the ability to control inflation. That will allow the RBI to lower interest rates, which will spur capex.
It’s also interesting that consumption growth this fiscal has been the lowest in the last seven years. Even private consumption growth, at 6.5%, is the lowest in seven years. In 2008-09, during the worst of the financial crisis, private consumption growth was higher at 7.1%. This suggests that inflation has eaten into consumption growth. The council estimates inflation at 5-6% for 2012-13, which allows it to pencil in higher growth.
The report also says there has been a shift in household savings from financial to physical assets, by as much as 1.6 percentage points of GDP, again because of inflation. Gross financial savings of households had peaked at 17.9 per cent of GDP in
2006-07, from where it has steadily fallen to 13.6 per cent in 2010-11. The Council also believes that lower inflation and better investment opportunities will lead to lower gold imports in 2012-13, helping the current account deficit.
And lastly, for what it is worth, the council forecasts net portfolio inflows at USD 10 billion in 2012-13, much above this fiscal’s USD 4.9 billion but well below 2010-11’s USD 30 billion.
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Graphics by Yogesh Kumar