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Business News/ Opinion / Indian economy: preparing for a delayed take-off

Indian economy: preparing for a delayed take-off

The govt needs to urgently push for investment and growth while managing expectations over the next four months

Photo: MintPremium
Photo: Mint

The World Bank recently raised India’s gross domestic product (GDP) growth rate for 2014-15 to 5.6%. Various forecasters have predicted the growth rate for 2014-15 that varies around this mark. Our annual mid-year review of the economy shows that the real GDP growth rate for 2014-15 may be around 5.0 %, and could even be lower if downside risks are borne out. Another year of sub 5% growth, the third in succession, could drive down economic sentiment dramatically. An expectation management effort is essential now as an insurance against the downside risks faced by the economy.

Growth expectations moved up after higher-than-expected GDP growth of 5.7% in the first quarter this fiscal driven by faster growth (3.5%) in the manufacturing sector.

However, since then, growth in industrial value added has decelerated well below consensus. Latest reports of a tepid festival demand for autos and housing do not portend well for industrial and manufacturing growth in the remaining months of this fiscal. Most firms are still stranded with excess capacity, thereby ruling out fresh investment. Consequently, credit off-take remains anaemic. Exports have slowed considerably from the double digit growth in first quarter and the continuing weakness in the global economy casts a shadow over export demand in the coming months.

India’s agriculture sector, that contributes about 14% to GDP, is still partially dependent on the monsoon that primarily impacts the Kharif crop. This crop accounts for about 49% of total production. Overall, the impact of a slightly deficient monsoon is not expected to be large as the monsoon as well as crop sowing this year improved from the end of July. However, the high agriculture growth in 2013-14 at 4.7% combined with weak negative impact of the monsoon will result in agriculture growth being around 1% in the present fiscal.

Some of the lead indicators for industrial growth such as sales of medium and heavy vehicles and steel have been slowly improving in the last few months, but the sectoral growth remains sluggish. This is reflected in slow announcement of new projects, poor non-food credit off-take, and continued pressure on the balance sheets of private companies. All this leads us to estimate industrial sector growth to be closer to 3%. Poor festival demand in October implies continued demand weakness stretching into the third quarter as well.

In the services sector, some lead indicators such as railway and aviation traffic have shown a positive but somewhat weak growth in the second quarter. But other indicators such as bank deposits and non-agriculture credit growth, services exports (including software services), new home sales, new investment announcements etc show lower growth or have remained muted.

Growth impetus can come from higher public expenditure to compensate for weak private demand. However, the government has been forced to slash expenditure to meet its rather tough fiscal deficit target. This is on account of lower-than-expected tax revenue growth and delayed start of disinvestment despite the bonanza of a lower subsidy bill because of the sharp fall in global crude oil prices. So, the fiscal space to prop up the economy is very limited. Therefore, services sector growth, that contributes about 60% to overall GDP, will be only slightly higher around 7% from 6.8% in 2013-14. According to our estimates, overall GDP growth in 2014-15 will improve but only slightly over last year to barely touch 5%.

The government will do well to manage growth expectations and engineer a softer landing for the stock market. This will also help its disinvestment programme that will be bunched up in the fourth quarter. Better still the government should do whatever it can at this stage to minimizing downside risks of higher inflation and pump priming the economy by higher public expenditure to push up overall demand. Clearing of stalled investment projects and their accelerated implementation will also contribute to raising investment demand and achieving higher growth.

Four specific steps the government should take are: First, implement the goods and services tax (GST) as early as possible. Second, the Reserve Bank of India (RBI) needs to be convinced to reduce rates by the government taking appropriate measures to ensure that food inflation remains muted. Most of the structural reasons for high inflation in India like widening fiscal deficit, sharply accelerating rural wages, and negative real interest rates have already started reversing. However, policy dissonance on account of interest rates is, at this stage, best avoided.

Third, the fiscal deficit target should not be considered as sacrosanct. At a time, when private investment is low, public capital expenditure should be accelerated to start a new investment cycle. A slightly higher fiscal deficit at 4.3% of GDP, incurred for increased capital expenditure will be good for the economy at this point. Being fiscally dogmatic at this stage will not help. Fourth, the rupee exchange rate should at all cost be prevented from appreciating and some assurance held out to exporters for sustaining a favourable exchange rate. This will bolster export demand in the fourth quarter.

The government surely realizes that growth impetus has to be built up and investment sentiments brought back in the next four months. The time to act is now. The four steps enumerated above along with managing expectations could do the trick.

Rajiv Kumar and Geetima Das Krishna are, respectively, senior fellow, and senior researcher in the macroeconomic unit, at the Centre for Policy Research, New Delhi.

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Updated: 27 Nov 2014, 05:58 PM IST
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