A new low for growth

The picture is much worse than the 4.5% headline number

It is an ironic indication of how sentiment has become negative about the immediate future of the Indian economy that even a 26-quarter low figure is being seen by some observers as something of a relief. India’s gross domestic product (GDP) growth for the second quarter of the ongoing fiscal year is only 4.5 per cent — the lowest it has been in at least six years. Even growth at current prices is only 6.1 per cent. There is little doubt that the Indian economy is in the midst of a slowdown, one that appears to be driven by both supply- and demand-side factors. Nor is there much immediate hope of a sustainable recovery.

Among the most worrying factors in this GDP print are its estimates of gross fixed capital formation (GFCF). At current prices, it is 27.3 per cent of GDP and at constant prices, 30.1 per cent of GDP — in each case, about two percentage points lower than the figure for the same quarter of the previous year. The auguries for the current quarter, between October and December, are not good. The core sector output data, also released on Friday, indicated a shrinkage of almost 6 per cent. It is hard to see growth for the full fiscal year crossing 5 per cent.

The government has attempted to revive demand by ensuring that welfare spending grows and seeking to expand other aspects of its own spending. But that strategy is reaching the end of its usefulness. Government final consumption expenditure, or GFCE, has grown at over 15 per cent year on year, and is about 12.4 per cent of GDP. In other words, it contributes almost 2 percentage points of the 4.5 per cent overall growth in GDP. The non-government sector, therefore, may be growing only at about 3 per cent. Clearly, therefore, the picture is much worse than the headline number of 4.5 per cent and government spending is sucking dynamism out of the private sector.

The government will have to accept that this is a problem that cannot continue to be tackled by its own spending. It has already sought to revive some animal spirits in corporate India through tax cuts, and announced an ambitious disinvestment agenda. However, more is needed. Long-pending structural reforms will have to be given some impetus. Labour and land reform, of course, is at the top of that list. India is too high-cost and risky an economy to attract investment at the moment. Risk must be reduced through administrative, regulatory, and judicial reform. Goods and services tax (GST) needs urgent attention — it will have to be simplified to reduce the burden on taxpayers, and made more efficient so that government revenues can recover.

But various blockages in the economy’s arteries must also be cleared. These blockages are not limited to the banking sector or real estate, though those are two obvious culprits. The government and public sector must also start disbursing funds on time. The only way out of this hole for the economy is private investment reviving. That will require more than pep talk from the government. It will require a genuine effort to increase the fund flow to productive sectors of the economy.