|Back to the future|
|Thursday, 01 March 2012 04:08|
Fiscal deficit and investor confidence key to GDP
Given the steady fall in GDP growth, from 7.7% in Q1FY12 to 6.9% in Q2 and 6.1% in Q3, even the 6.9% projected by the Advance Estimates for the full year looks a bit difficult now, let alone the 7.1% estimate made by the Prime Minister’s Economic Advisory Council for 2011-12. For this to happen, Q4 GDP will have to clock 6.9%, which means a reversal of trend for the past three quarters. Theoretically, this is possible, but it is not clear how the services sector can keep growing at 8-9% in each quarter while both agriculture and manufacturing continue to slow—manufacturing has slowed from 7.2% in Q1 to 2.7% in Q2 and a mere 0.4% in Q3. Exports have been a buffer and their share has risen from 21.6% of GDP in Q1FY11 to 25.4% in Q2FY12, before falling to 24.9% in Q3FY12—with the exports scenario looking as it is, no turnaround can be expected in Q4. The high share of exports in GDP and the high share of foreign capital in overall investment levels suggests, quite contrary to what most policymakers seem to assume intuitively, that India’s growth is closely interlinked with global growth—India’s growth cannot pick up at a time when the global economy remains in turmoil.
The larger question of 2012-13 growth, of course, also depends on whether India is able to reverse the sharp fall in savings and investment, and the distortions within this. Gross capital formation fell from 38% in 2007-08 to 35.3% in 2011-12 and, within this, private corporate investment fell from 17.3% in 2007-08 to 12.1% in 2010-11. Given that such investment is around 45% of the total, unless this is reversed—Q3 data shows no such sign—overall investment levels cannot rise. Just cutting interest rates, as many believe, will not cause investments to rise—a very large number of projects are stuck in environment/land clearances and, in an equally large number of cases such as Vodafone and 3G roaming, investors feel government policy is hostile.
Linked to the fall in investments is the sharp fall in savings rates and the key to this is the fall in public sector savings from 5% of GDP in 2007-08 to 1.7% in 2010-11. The key to reversing this lies in not just cutting back on the fiscal deficit but in the government being able to hike petroleum prices so oil PSUs don’t lose R1.4 lakh crore a year and in ensuring the Railways charge economic prices from passengers, among others. In other words, whether India can get back on track critically depends on how the Budget tackles the fiscal deficit. And whether its actions are able to convince investors that the government is going to give them a fair deal.