India GDP: Revival on the cards

Gross Domestic Product (GDP) growth for 2013-14 has come in at 4.7 per cent. This is lower than the government’s advance estimate of 4.9 per cent growth and only slightly above the 4.5 per cent growth of 2012-13. While the fourth quarter of fiscal 2014 has failed to see any revival in industry and services, GDP growth was in fact lower in the second half (H2) of fiscal 2014 at 4.6 per cent, compared to 4.9 per cent in the first half of fiscal 2014.

The financial/business services and agriculture sectors drove growth in 2013-14 while manufacturing continued to be a laggard. Of late, there has also been an uptick in mining and utilities (due to higher electricity production). On the demand side, net exports contributed to more than half of GDP growth because of a fall in imports and increase in exports.

The government’s top priority now should be to revive the economy by improving the business climate and fast-tracking the project pipeline through greater clarity on land acquisition and speedier environmental clearances. To improve and fulfil India’s long-term growth potential, it is equally imperative for government to exercise fiscal discipline, lower inflation, improve bank asset quality and revive manufacturing.

In 2014-15, under the assumption of normal monsoon, we expect GDP growth to rise to 6 per cent. This will be led by higher industrial growth driven by infrastructure projects, many of which were cleared last year. But if monsoons fail, GDP growth could be lower, at 5.2 per cent.

Where is growth looking up?

n Agriculture: A good monsoon pushed agriculture growth to 4.7 per cent in fiscal 2014; total foodgrain production rose nearly 3 per cent. However, current climate forecasts indicate increased likelihood of a deficient monsoon in 2014-15 that could affect agriculture production.

n Financial, insurance, real estate and business services: This sector contributed more than half of the overall GDP growth in 2013-14 although, in terms of size, it is only 20 per cent of the economy. It grew by 13 per cent on the back of a rise in business services exports and aided by a pick-up in bank deposits and lending growth in H2 of fiscal 2014 (following surge in non-resident deposits). Improving global prospects could continue to favour this sector in fiscal 2015.

n Electricity: Electricity production rose to 961.5 billion units (BU) in fiscal 2014 from 907.2 BU in the previous fiscal, mainly on account of capacity additions (nearly 38 GW) over the past two years. Crisil Research expects electricity production to grow by 4-5 per cent in 2014-15 due to capacity additions (around 11 GW) as well as marginal increase in PLFs led by improvement in coal supply.

n Mining: The sector has gathered pace in recent months; fall in output was lower at 0.8 per cent in H2 of 2013-14 compared to 2 per cent in the first half. Mining output may be expected to pick up in coming quarters due to lifting of the regulatory ban on mining in Karnataka and Goa. Prior to the mining ban, these two states accounted for 4-5 per cent of mining output. Mining bans in other major mining states with significant share in the country’s output – Andhra Pradesh and Chhattisgarh (about 13 per cent each), Odisha (10 per cent), and Gujarat and Madhya Pradesh (about 8 per cent each) — are awaiting resolution.
n Net exports: A 2.5 per cent fall in imports and 8.4 per cent growth in exports improved the net export position and contributed 54 per cent to overall growth in fiscal 2014. Although the continued global recovery will support growth in exports, the net export position will be less favourable in 2014-15 as imports will pick up gradually in line with domestic growth

Where is growth still lagging?

Trade, hotels, transport and communication: Accounting for nearly 27 per cent of the economy, this sector is almost entirely driven by demand from the private sector and has been facing the wrath of declining consumption and investment demand as well as the spillover effects of sulking industrial growth. In 2013-14, the segment grew 3 per cent compared to 5.1 per cent in 2012-13; however, growth saw some revival in H2 2013-14.

But the manufacturing sector, 16 per cent of the economy, has continued to suffer as output fell 0.7 per cent in fiscal 2014 as the impact of weak domestic demand outweighed the benefits of rising exports.

Private consumption growth was higher in H2 2014, though high inflation and weak income prospects dented consumer sentiment.

Investment growth fell 0.4 per cent in H2 2014 and for the full year remained flat. An improvement in investment efficiency is critical to encouraging fresh investments and driving growth.

(The authors are principal and senior economists respectively with Crisil Research)