Precipitous slide

What should one make of the indicators coming out of various rating agencies on GDP growth that are regularly falling short of government expectations?

Monday’s rating by Morgan Stanley revised downward India’s growth forecast to 5.1 per cent for the current fiscal from the earlier 5.8 per cent. This followed GDP numbers released last Friday showing growth rate in the first quarter of fiscal 2013 sliding to 5.5 from 8 per cent in the same period last fiscal.


Last month, Moody’s, CLSA, Crisil and Citigroup were among investors who slashed India’s growth forecast for 2012-13 to about 5.5 per cent. While growth in the manufacturing and infrastructure industries fell in the first quarter ending June, only construction showed decent growth. But the effects of higher construction activity have not been reflected in core sector output which has been badly hit by a paucity of investor confidence leading to rapid fall in fixed investments.

Even what the government and policy barons touted as the infallible cornerstone of the Indian economy – services – is beginning to falter under a combination of falling private investments largely in the fixed investment domain, cutbacks in discretionary spends and dwindling order pipelines.


Investment growth which was 19.4 per cent in Q4 2010 has averaged just 5.8 per cent in the subsequent eight quarters till Q4 2012. Last fiscal’s GDP growth was the lowest in nine years. Indeed, there is more bad news to come on this front --  fiscal deficit in the first four months of the current fiscal alone has already reached more than half the budget target and it is likely to spin out of control well before the fiscal closes.

At this rate, GDP growth for fiscal 2013 will fall short of the RBI’s revised target of 6.5 per cent per cent. Rebalancing the economy through efficient expenditure control measures is imperative at this stage as this macro-economic contraction cycle is unlikely to play itself out anytime soon.

The present crisis has resulted in finance minister P Chidambaram emitting the usual canny disclaimers and feeble calls to action. The larger moribundity and its underlying sickness needs to be addressed. Besides, there is a clear case to improve the torpid liquidity situation through more aggressive tapping of credit from overseas bond markets and private equity investors, like Ireland and Spain have been doing. A government still slumped over in hubris should get its act together at this stage of the game.