New Delhi: The Indian economy is projected to expand by 8.6% to a record $1.73 trillion (around Rs 80 trillion) in the current fiscal, according to the Central Statistical Organisation (CSO), sustaining its growth trajectory.
At this level of nominal gross domestic product (GDP), India’s per capita income works out to about $1,200, effectively making it a middle-income country. While this will enhance the country’s global standing, it will be less eligible for soft loans from multilateral institutions for social sector projects and, hence, make it that much more difficult for the government to generate the desired resources.
The economy’s size was $1.4 trillion in 2009-10 and its per capita income estimated at $1,019. The country crossed the per capita threshold of $500 in 1999-2000.
During the current fiscal, the farm sector is expected to see robust growth of 5.4% as against 0.4% a year ago due to a normal monsoon and bumper harvests. Industry and the services sector are expected to hold on to their robust growth at 8.1% and 9.6%, respectively, compared with 8% and 10.05% a year ago.
Also See | Growth Track (pdf)
Analysts believe rising inflation and concerns on governance are posing a risk to this growth trajectory. With private consumption providing the stimulus, analysts believe growth will decelerate in the next fiscal as the effects of the recent round of rate hikes by the Reserve Bank of India (RBI) to tame inflation kick in.
Private consumption, expected to contribute 57.6% to GDP in 2010-11, is projected to grow 8.2% compared with 7.3% a year ago, while government expenditure is expected to grow 2.6% in the current fiscal against 16.4% a year ago.
Overall consumption in the economy is expected to slow to 7.3% in the current fiscal from 8.7% in the previous fiscal due to lower government consumption. While the trend in overall investment is estimated to slow from 13.8% to 8.8%, growth in gross fixed capital formation—a better indicator for analysing current trends— is expected to edge up from 7.3% in the last fiscal to 8.4% in the current one.
However, as Citi India economists Rohini Malkani and Anushka Shah point out in their research note, this masks the sharp deceleration in the second half of the year after RBI started its round of interest rate increases. While the growth was 15% in the first half of 2010-11, it is expected to slow sharply to 1.8% in the second half of the fiscal.
“An 8.6% (growth) is quite encouraging despite all these difficulties. Now the other issue is inflation, trade balance...these are to be addressed,” finance minister Pranab Mukherjee said on Monday.
Concerns have been raised, including by Prime Minister Manmohan Singh, over growth momentum being maintained next year. Singh, speaking at the second annual conference of chief secretaries last week, said even though India has weathered the global financial crisis relatively well, “inflation poses a serious threat to the growth momentum”.
The stickiness in inflation has forced RBI to revise its year-end inflation estimate to 7% by March this year from its earlier projection of 5.5%, while it continues to tighten monetary policy.
Anticipating fresh interest rate increases by RBI, Malkani and Shah have marginally scaled down their growth projection for the next fiscal to 8.4% from 8.6%.
However, they highlighted the bigger issue as “governance/corruption” and its negative feedback loop on lack of policy progress. “This could be the key surprise factor on the growth front,” they said.
Samiran Chakraborty, head of research at Standard Chartered Bank, concurred with the analysis and added that there was a good chance of growth estimate in the current fiscal being scaled down. “The current GDP estimate is an extrapolation of the available data (till November-December) for the full year. Growth in industrial production will come down significantly during the remaining months of the fiscal, which is not captured by this data,” he said.
However, a higher-than-anticipated nominal GDP at Rs 78.77 trillion may bring down the fiscal deficit as a percentage of GDP to 4.8%, against the budget target of 5.5%. “We will achieve the fiscal deficit target of the next fiscal in the current fiscal itself due to a revision in nominal GDP,” Chakraborty added.
He said reducing the fiscal deficit further in the next fiscal will be a key challenge because there won’t be such one-time gains as the spectrum auction that netted Rs 1.06 trillion.
“Expenditure growth might have to be carried out due to political compulsions on account of state elections later this year,” Chakraborty pointed out. Elections in key states such as West Bengal, Tamil Nadu, Kerala and Assam are due later this year.
Graphic by Ahmed Raza Khan/Mint
PTI contributed to this story.