BackSubdued GDP growth adds pressure on Modi govt
GDP grew 4.7% in the year ended 31 March, marginally higher than the previous year, but below expectations
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New Delhi: For the second year in a row, the Indian economy grew less than 5% in the year to 31 March, data released on Friday confirmed, exerting greater pressure on the new government to accelerate reforms and kick-start stalled investments.
Gross domestic product (GDP) grew 4.7% in the year ended 31 March, marginally higher than the 4.5% growth in the previous year, the statistics department said.
It was lower than the 4.9% expansion predicted by the department.
In the three months ended March, the economy expanded 4.6%—the eighth successive quarter that growth was below 5%.
The data, coming four days after the government of Prime Minister Narendra Modi assumed office, piles more pressure on the new administration to attract investments and get stalled projects moving, analysts said.
The manufacturing sector contracted 0.7% in 2013-14 compared to 1.1% growth in the previous year. The marginally higher GDP growth was led by agriculture, which expanded 4.7% compared with 1.4% in the previous year. While most service sectors slowed, growth in financial services quickened to 12.9% from 10.9%, aided by the inflow of non-resident Indian deposits.
Growth in community, social and personal services, which mostly represents public expenditure by the central and state governments, slowed significantly in the fourth quarter to 3.3% from 5.7% in the third quarter because of compression in Plan expenditure by the central government to lower the fiscal deficit.
An industrial contraction remains a worry, making it imperative for the new government to focus on reviving the manufacturing sector by sorting out supply chain issues and facilitating investment, said Anis Chakravarty, senior director at consulting firm Deloitte India.
“Speedy implementation of policies aimed at improving infrastructure and adequate land acquisition measures are some of the needs for development of the sub-sectors (of the economy)," Chakravarty said.
Weak demand, high borrowing costs and stalled projects on account of delays in securing government approvals have contributed to the sharpest economic downturn in India in a decade.
Capital investment contributes nearly 35% to India’s economy, but it contracted an annual 0.1% in the fiscal year that ended in March.
Projects worth ₹ 6.2 trillion were shelved last year due to bureaucratic gridlock, according to the Centre for Monitoring Indian Economy, a think-tank. This is the highest in the past 18 years.
The new government has little time to squander—it has to present the budget for the current fiscal year (2014-15) in the first week of July which is expected to passed by 31 July after debate.
Foreign as well domestic investors, analysts, economists and businessmen will be keenly watching the Modi government’s first budget for signals on the ruling National Democratic Alliance’s (NDA’s) plans for the economy.
“The fact that the Modi government has come to power will have some upside to growth," said Devika Mehndiratta, an economist with Australia & New Zealand Banking Group Ltd. “Their first priority will be implementing stalled projects, stay the course on fiscal consolidation and possibly even speed it up by subsidy reduction."
The Modi-led Bharatiya Janata Party (BJP) won 282 seats in the Lok Sabha in the recent general election, the highest for any single party since 1984, giving it a majority in the 543-member Lok Sabha.
Together with its NDA partners, the BJP has 336 supporters in the lower House, which analysts say would give it the room to take politically sensitive decisions like cutting subsidies.
On Thursday, Modi asked his ministers to prepare a 100-day action plan for their respective ministries and to clear all pending matters.
Data separately released by the Controller General of Accounts showed the central government’s fiscal deficit at 4.47% of GDP in 2013-14, a tad lower than the 4.6% estimated in the February interim budget by then finance minister P. Chidambaram, mostly due to a ₹ 22,447 crore cut in Plan expenditure.
The new government knows what it needs to do. After taking charge as finance minister, Arun Jaitley said his priority will be to restore the pace of economic growth and curb inflation while keeping the focus on fiscal consolidation.
While the government may like to see policy rates fall to revive consumption and investment demand, the high level of retail inflation—at 8.59% in April, a three-month high—means Reserve Bank of India governor Raghuram Rajan would hold interest rates in his next monetary policy review on 3 June.
Rajan kept the policy rate unchanged at 8% in the bi-monthly credit policy review on 1 April, suggesting that rates may not be raised further in the near term if the economy continued along the disinflationary path.
Since September, RBI has increased the repo rate, at which it lends overnight to commercial banks, thrice by a total of 75 basis points, refusing to lower its guard against inflationary threats.
One basis point is 0.01 percentage point.
In Tokyo on Friday, Rajan said reviving growth is the new government’s immediate challenge while the central bank works to lower inflation.
Bloomberg and Reuters contributed to this story.
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