Growth: Too timid by half

India’s sluggish economic growth of 5.3 per cent in the three months to September comes on the back of 5.5 per cent growth in the previous quarter.

From here, the government expects the economy to pick up and post a growth rate of close to 6 per cent in the fiscal year ending March 2013.

This would be crucial to sending a signal to investors and stakeholders that the Indian growth story is alive and kicking.

The government has taken a number of measures in past months to prove that growth has not stagnated, and the sluggishness of the economy is only a temporary phenomenon owing to several reasons like the worldwide economic slowdown.

But, most of the micro and macro parameters of the economy have showed signs of weakness, suggesting that they will provide little succour to dwindling growth.

Only recently did Finance Minister P Chidambaram accept that the country faces a difficult situation.

Gross Domestic Product (GDP) data in the past three quarters show that India grew at 5.3 per cent in the January-March quarter and could stretch this performance up to 5.5 per cent, before reverting back to 5.3 per cent.

Economists doubt the country can grow anywhere beyond the current rate and believe that 6 per cent growth would be a far-fetched dream.

The government and its policy makers are not ready to accept this and harbour the hope of a sudden rebound in the economy post November, which can give them the magic figure of 6 per cent or close to that by the end of March.

The question here is why one should believe that the economy will pick up pace hereon. Agricultural growth has dropped to a mere 1.2 per cent in the latest quarter from 3.1 per cent a year ago.

Manufacturing growth slumped to 0.8 per cent from close to 3 per cent. Industry has not fared well either.

Growth in services, the mainstay of the Indian economy, has dropped to 7.2  per cent with trade, hotels, transport and communication growing just 5.5 per cent against 9.5 per cent a year ago. Merchandised exports, which account for about 10 per cent of GDP, has fallen for six straight months this fiscal.

Gross fixed capital formation has picked up after a long time. It was above 4 per cent in the September quarter from below one per cent in the last quarter, cheering up the government, which wants to believe that investment activities have picked up. But economists say that this is a reflection of increasing government consumption. Private consumption has not shown much improvement. It is at 3.7 per cent -- a decadal low.

Numerous painpoints

“Though investment has seen marginal pick-up, we do not know how durable it is,” Crisil Economist D K Joshi says.

Other economists note that rise in government consumption expenditure indicates that it is government spending that is helping economy grow. This will only pile on more pressure on the fiscal deficit.

Incidentally, the fiscal deficit figures released the same day as GDP numbers showed that it has reached over 71 per cent of the full-year budgetary target. Although this is a tad better than the fiscal deficit numbers of last year, it is by no means going to help the government. Public expenditure is rising at a faster pace than public revenues. The Centre’s aim to restrict the deficit to 5.3 per cent of the GDP looks difficult.

Two major revenue earning exercises -- spectrum sale and disinvestment -- through which New Delhi wanted to garner Rs 70,000 crore this year, have not moved at the expectated pace. In the eight months to the current fiscal, the government has mopped up only Rs 932 crore through PSU divestment and a little over Rs 9,000 crore from sale of spectrum.

On 2G Spectrum, the government has received a huge blow,” said Brinda Jagirdar, economist with State Bank of India. She said that even if disinvestment brings in the desired Rs 30,000 crore, it will be difficult to maintain the 5.3 per cent projection of fiscal deficit which could touch 5.5 per cent this year.

Not only is fiscal deficit high, but current account deficit and trade deficit have also reached alarming proportions. In the past year, India has witnessed falling GDP growth rate accompanied by rising CAD and FD. These suggest that is India living beyond its means, and its ability to repay debt is also weakening.

Experts say a CAD of 4.1 per cent at a time when the economy is growing at 5.3 per cent, is not sustainable. This puts undue pressure on the rupee, which has depreciated faster this year and risen above 55 to a dollar.

Groping for growth

The government has taken some measures to raise the cap on foreign institutional investments in debt instruments by $10 billion from the prevailing $65 billion, a measure than will help bridge the CAD. But, experts say that it is a case of too little, too late.

Other much needed measures to raise India’s growth rate such as implementing the Goods and Services Tax, and bringing in the Direct Tax Code are in the pipeline, where government expects to see them through.

It has already taken measures to bring in more FDI into airlines, raising the cap on insurance FDI and opening up the pension sector to overseas players. Opening up the retail sector is in progress and UPA hopes to achieve some success on that in the Winter session of Parliament.

When will all the above measures bear fruit? At least not in this fiscal year, even if all of them are implemented. Any addition or subtraction of the numbers will not help the government arrive at a 6 per cent GDP growth rate, or even close to that in 2012-13, feel economy watchers.

“In the last two quarters, the economy grew at an average of 5.4 per cent. To reach 6 per cent for the full fiscal year, it needs to grow above six per cent in both the quarters ahead, which looks improbable with inflation reining high and all other macro-economic indicators showing poor growth,” Jagirdar said.

Hence, nothing in the July-September quarter GDP numbers give reason for optimism. However, GDP growth will benefit in the next two quarters from a favourable base effect, even if it does not reach the six or close to six per cent figure.