On Friday, the Union ministry of statistics released estimates of gross domestic product for the first quarter of this financial year. Between April and June of 2012, GDP grew 5.5 per cent compared to the equivalent quarter in the previous year, which was better than expected; in the previous quarter, January-March 2012, GDP had grown 5.3 per cent year-on-year, and so the performance was marginally better. This was the first uptick in quarterly growth for a year. However, it is more than clear that there are few grounds for optimism; even those within the government, such as Montek Singh Ahluwalia, have been hesitant to call this a “rebound”. It is far from clear that growth is poised to recover. Indeed, the signs suggest otherwise. Most visibly, overall growth was not matched by growth in gross fixed capital formation, which grew merely 0.7 per cent between April and June. In the same quarter of last year, gross fixed capital formation had grown 14.9 per cent. In the absence of a healthy rise in fixed investment, future growth prospects look bleak.
The worrying trend in fixed investment is reflected in the continuing woes of the manufacturing sector. Only construction grew solidly, at 10.9 per cent. The eight infrastructure industries that comprise the “core” sector grew merely 1.8 per cent by comparison. In the absence of new investment, it is difficult to see this sector revive, and manufacturing growth will continue to be depressed. Nor will consumer sentiment be buoyant enough to compensate; private final consumption expenditure grew only four per cent. Indeed, demand is being provided by government consumption, which grew by nine per cent year-on-year in April-June 2012 compared to 4.9 per cent in April-June 2011.
Yet the assessment of government finances released simultaneously with the growth numbers shows that this is definitely unsustainable. The central government has already used up more than half the budgeted fiscal deficit for the entire financial year. The Budget projected a fiscal deficit of Rs 5.13 lakh crore; in four months, the Centre is Rs 2.64 lakh crore in the red. Missing the fiscal deficit target of 5.1 per cent of GDP – sold earlier as realistic – will definitely cause international sentiment on India to turn sharply negative, and have serious inflationary effects. Many observers feel it may slip to the neighbourhood of six per cent of GDP unless the government drastically reforms its expenditure and receipts.
Thus, the government is caught in a bind. It is necessary to push the economy out of its low-growth rut; but it simply does not have the finances to spend its way out of trouble. Indeed, consolidation of the fisc is now an economic imperative. It becomes essential, therefore, for the government to cut down on expenses without sacrificing an equally important increase in infrastructure spending. There is no better opportunity for subsidy reform. Diesel subsidies, for example, which were allowed to persist over such fears that a poor monsoon required farmers to operate gensets, are now unaffordable at present levels. In any case, the monsoon is now better, and inflation is below seven per cent. Subsidy cuts and quick action on investment projects are required, or India will find 5.5 per cent growth is its new normal.
