New Delhi: In an unpleasant shock, India’s economy is projected to grow 5% in the current fiscal year, the lowest in a decade and substantially lower than the 5.7% projected earlier by the finance ministry.
Worse, the economy, presently estimated at $1.89 trillion (around Rs.100 trillion), would see growth decelerating by almost half from 9.6% in 2006-07. The attendant economic shocks, such as a spurt in excess capacities and retrenchment from the workforce, would, say experts, make it difficult for the economic agents to stage a quick recovery—especially given the inclement global conditions and uncertain domestic polity that is slowing policy initiatives.
The new numbers—advance estimates released on Thursday—show that it is precisely the setback to consumption and investment that’s behind the steeper-than-expected shortfall in economic growth now being projected in the current fiscal, while also pointing to a bottoming-out of the economy.
In April-September, the economy grew 5.4%, indicating it may grow 4.6% in the second half of the year. Per-capita income at current prices is estimated to rise 11.7% to Rs.68,747 in 2012-13 from Rs.61,564 in the previous year.
Finance minister P. Chidambaram, who is set to present the Union budget on 28 February, faces the unenviable task of balancing the urgent need for fiscal consolidation without killing the green shoots of growth ahead of the 16th general election due in 2014.
The finance ministry, in a statement, said the growth projection is based on extrapolation of numbers till November and that the actual growth rate is yet to be known.
“Since then (November), leading indicators have turned up, suggesting some hope that we will end the year on a better note. Also, sectors such as trade and transport, which are related to industry, would also tend to get revised upwards, if growth outcomes are better,” it added. “We are keeping a watch on the situation. We have taken and will continue to take appropriate measures to revive growth.”
Reserve Bank of India (RBI) governor D. Subbarao said the central bank will take the latest growth estimates into account while framing the monetary policy for its next review in March. Subbarao also said he is looking forward to the coming budget for the 2013-14 fiscal year to get a better sense of the government’s fiscal consolidation plans.
Last month, RBI cut its policy rate by 25 basis points to boost growth. A basis point is one-hundredth of a percentage point.
During the current fiscal year, the agriculture sector is expected to grow at 1.8% compared with 3.86% in the previous year, due to poor monsoon rainfall in June-July, while industrial growth is projected to slow to 3.1% from 3.5% a year ago due to the manufacturing slowdown. The services sector, which constitutes 59% of gross domestic product (GDP), surprised at the downside, with estimated growth of 6.6% compared with 8.2% a year ago, mostly due to the lower estimate of growth for trade, hotels and communications sector.
Pronab Sen, a former chief statistician of India, said he expects the overall GDP number to be revised upwards as more data flows in. “The advance estimates data does not pick up turning points and it tends to magnify current trends. This is the nature of such forecasts. We cannot do much about it,” he added.
However, Sen said that seasonally adjusted data shows growth has been flat for the last three quarters. “Though it is quite certain that the economy has bottomed out, we cannot say for sure that it will pick up from here onwards,” he added.
D.K. Joshi, chief economist at Crisil Ltd, said the slowdown in growth from 9.3% to 5% could have serious repercussions on job creation and investments in the economy.
“What is happening now is the size of the cake is not growing,” Joshi said, referring to the limited opportunities being generated for a young nation where 12 million people are entering the job market every year.
Growth in total consumption, including private consumption, is projected to halve in 2012-13 to 4.1% from 8.1% a year ago. However, investment growth as measured by gross fixed capital formation picked up to 5.1% from 4.4% a year ago.
The consumption slowdown could be due to the relatively higher interest rate environment and containment of government spending, Citibank India economist Rohini Malkani said.
On Wednesday, the International Monetary Fund (IMF) said the Indian economy is expected to grow at 5.4% in the year. Last week, India’s statistics department revised the economic growth data for the year ended 31 March 2012 to 6.2% from 6.5% estimated earlier. The Indian economy faces the risk of decelerating further if the government delays structural reforms in the economy, IMF said.
The overall GDP growth number came as a shock mostly because of lower growth estimates in the services sector, according to Madan Sabnavis, chief economist at CARE Ratings. “Given that investment is not yet picking up and consumption growth remains muted, economic growth in the next fiscal will remain subdued, growing at around 6%,” he said.
The trade, hotels and communications sector is estimated to grow at 5.2%, compared with 7% in the last fiscal, while the financing and insurance sector is projected to slow to 8.6% against 11.7% a year earlier. Community and social services, which measure government expenditure, has been estimated to accelerate to 6.8% from 6%.
Sabnavis said that since Chidambaram has been severely cutting Plan expenditure of various ministries to meet his fiscal deficit target, 6.8% growth in community services seems an overestimation and may need to be revised down.
The advance estimates of GDP for the current fiscal year may also make it tougher for the finance minister to achieve the revised fiscal deficit target of 5.3% since the GDP estimated at market price during budget calculations has also fallen short.
While the budget calculations were made assuming 14% GDP growth to Rs.101.6 trillion in terms of market price, Thursday’s advance estimates showed GDP at market price to have grown 11.7% to Rs.100.3 trillion. Even if the government sticks to its revised market-borrowing programme, the fiscal deficit may turn out to be 5.45% of GDP.
Sabnavis said it would be a miracle if the finance minister was able to achieve the fiscal deficit target under the current circumstances.