 "Govt will have to revive growth to see over 6% GDP expansion in FY14")
What will help the economy grow in the expected range is the low base of 2012-13. The economy grew by just 5%, lowest in ten years. That may push economic growth to somewhere over 6%.
However, the low base can only push up economic growth to an extent. The case in point is the fourth quarter of 2012-13.
Despite a low 5.1% economic growth in the fourth quarter of 2011-12, GDP expanded by just 4.8% in Q4, 2012-13. Not only this, the growth rate in Q4, 2011-12 was revised down from earlier 5.3%. Even then, the effect was neutralised by slow expansion in almost across the sectors. This is despite the fact that Q4 was expected to be the quarter when some results of reforms taken since September, 2012 onwards were expected to come.
This clearly indicates that the so-called green shoots of recovery are not visible or are blurred. There was not even a single sector which showed higher growth in 2012-13 than the previous fiscal year (See Chart).
Besides, economic growth for 2012-13 at 5% was same as estimated by the Central Statistics Office earlier in its advance estimates, but there were too much differences within a break-up of this growth.
It was just the largest sector of the Indian economy -- trade, hotels, transport and communication-- which pushed the economic growth in 2012-13. This sector grew 1.2 percentage points higher at 6.4% in the actual numbers released on Friday than 5.2% in advance estimates. Otherwise almost all major sectors declined significantly in the first actual numbers compared to the February estimates.
The worst affected was mining and quarrying as it suffered a de-growth of 0.6% in the actual GDP numbers compared to 0.4% growth in advance estimates.
See deceleration in other sectors-- manufacturing could grow only one% in the actual numbers than 1.9% calculated in advance estimates, electricity and associated sectors by 4.2% against 4.9%, construction 4.3% against 5.9%, community and social grew 6.6% against 6.8%.
Farm sector grew marginally higher at 1.9% against 1.8% and financial sector expanded by 8.6%, same as was pegged in advance estimates.
It showed that had it not been for the trade, hotels, transport and communication, India's growth would have fallen steeper, even below five%.
Given that statistical effect could only partly help look growth higher, crucial fundamentals of the economy become important.
Take look at these parameters-- demand in the economy remained low as private final consumption expenditure rose just 3.81% in Q4 against 4.15% in Q3. Also, gross fixed capital formation, a proxy for investment rate, grew just 3.43% against 4.5% in these two quarters.
Sector-wise mining contracted for the second successive quarter – by 3.1% in Q4. Farm sector growth declined to at least two- year low of 1.4% in the fourth quarter of 2012-13.
Electricity and associated sectors grew by just 2.8% in Q4, 2012-13, the lowest figure in at least two years.
Trade, hotels, transport and communication sector could grow just 6.2% in the fourth quarter, its lowest expansion in 2012-13. Even then, this sector pushed up the yearly growth clearly indicated that the government expected it to do much worse in the fourth quarter.
| 2011-12 (% growth yoy) | 2012-13 (% growth yoy) | |
| Agriculture & allied activities | 3.6 | 1.9 |
| Mining & Quarrying | (-)0.6 | (-)0.6 |
| Manufacturing | 2.7 | 1.0 |
| Electricity, gas & water supply | 6.5 | 4.2 |
| Construction | 5.6 | 4.3 |
| trade, hotels, transport and communication | 7 | 6.4 |
| Financing insurance, real estate & business services | 11.7 | 8.6 |
| Community, social & personal services | 6 | 6.6 |
| GDP | 6.2 | 5 |
Planning Commission Deputy Chairman Montek Singh Ahluwalia remarked cautiously when he said, "I think there is evidence that the economy has bottomed out but we don't yet have evidence of strong recovery."
There are not much indicators for this year's growth, but a confidence index of India Inc. compiled by the Confederation of Indian Industry clearly showed that economic recovery will be a gradual process.
The CII Business Confidence Index (CII-BCI) fell to 51.2 points for April-June, 2013 quarter as compared to 51.3 in the previous quarter.
This is much lower than 55 points during the first quarter of 2012-13 and 62.5 during April to June quarter of 2011-12.
“This mirrors the air of uncertainty that is still lingering among industry regarding the present business prospects and also throws into question the hopes of an early turn-around”, said Chandrajit Banerjee, Director General, Confederation of Indian Industry.
In the survey, domestic economic and political instability, high level of corruption, infrastructural and institutional shortages emerged as the top-three concerns, while risk from exchange rate volatility was ranked as the lowest concern for businesses at this moment.
So, the government will have to tackle these problems to revive India's economic growth. But, in the election year, will it be able to do so? As the country goes to the polls, other policy concerns like Food Security Bill will gain paramount importance over others.
Besides, we have some sort of indicators in the widely-tracked HSBC purchasing managers' index (PMI). PMI for both manufacturing and services declined in April, the former to the lowest in 17 months and the latter to the bottom of 16 months.
Besides, PMI for manufacturing released for May showed that output in the crucial sector contracted for the first time since March, 2009. However, PMI barely managed to remain in the growth zone. It stood at 50.1 points, the lowest in 50 months. The very fact that PMI comprises not only output, but also order books, outlook for future, made the index remained in growth trajectory. PMI above 50 points means a growth and below that score, it is a contraction.
Amid all this, there is a silver lining in the sense that government was able to rein in its fiscal deficit at 4.9% of GDP in 2012-13 against 5.2%, pegged in the Revised Estimates. It was even lower than the Budget Estimates of 5.1%. In fact, it moved closer to this year's target of 4.8%.
| 2012-13 (% growth yoy in advance estimates | 2012-13 (% growth yoy numbers) | |
| Agriculture & allied activities | 1.8 | 1.9 |
| Mining & Quarrying | 0.4 | (-) 0.6 |
| Manufacturing | 1.9 | 1.0 |
| Electricity, gas & water supply | 4.9 | 4.2 |
| Construction | 5.9 | 4.3 |
| trade, hotels, transport and communication | 5.2 | 6.4 |
| Financing, insurance, real estate & business services | 8.6 | 8.6 |
| Community, social & personal services | 6.8 | 6.6 |
| GDP | 5 | 5 |
However, this has come at a cost-- the government resorted to expenditure compressing measure. The very fact that plan expenditure was cut over 17% at Rs 4.3 lakh crore in the Revised Estimate compared to Rs 5.2 lakh crore pegged in the Budget Estimate for 2012-13 speaks volumes about the way fiscal deficit was curtailed. Also, non-plan expenditure was raised by 3.3% at Rs 10 lakh crore against Rs 9.7 lakh crore clearly showed that priority was to tame fiscal deficit somehow.
Plan expenditure was further cut by 3.5% even from the revised estimate, while non-plan expenditure was lowered by only 0.06%.
In the current year, if the same policies were adopted to rein in fiscal deficit, it might become difficult to revive the economy, given the fact that demand in the economy is too low.
Realising this, Finance Minister P Chidambaram had said,"I don't wish to compress expenditure; therefore, revenues have to go up. For 2013-14."
He also laid importance on bringing down fiscal deficit below 4.8% for the current financial year, as laid down in fiscal consolidation road map as well as the Budget Estimates.
The fiscal space is also required to give comfort to RBI to ease monetary stance to bring down cost of borrowings as well propel demand.
To sum up, while it is still time for green shoots of recovery to become clearly visible, it is not all lost. The economy may still grow by over 6%, provided steps are taken to boost investment sentiments. While the government is in course of reviving the sentiments by having conciliation with Vodafone over a tax dispute, it is also taking up stuck up projects in the Cabinet Committee of Investments (CCI). Economic growth in 2013-14 and also in the medium term will be depend on these measures, if the initial hype given to CCI does not die as major states see assembly polls in November-December, six months are which the Lok Sabha polls will be due in 2014.