The advance estimates of a 5% GDP growth for FY13 come as a rude shock for those pencilling in a 5.5% growth for the year—given the 5.4% growth in the year’s first half, simple maths tells you this means the rest of the year’s growth will have to be a lower 4.6%, quite different from what the analysts were saying when they claimed the economy had bottomed out after Q2. As a result, Citi has lowered its FY14 estimate to 5.7% from 6.2% earlier. The bottoming out theory, it has to be said, never made sense since the effects of the poor monsoon were always going to be felt in Q3; besides, bank credit to the commercial sector grew just 7% between April and January, and that too on a dismal 9% growth over the same period last year; BHEL’s order book shrank 7% sequentially in Q3 and Tata Motors January sales of MCV/HCVs fell 12% sequentially in January. But that said, it’s important to keep in mind the ‘advance’ estimates mean little—FY12 final growth was revised downwards to 6.2% from the 6.9% earlier while the FY11 numbers were revised upwards to 9.3% from 8.4% announced earlier. And given that those doing the forecasts have little hard data other than that available publicly for H1, such revisions are hardly surprising.
Look at the components of the growth, and it becomes clear why the picture is not as dark as it looks, though the improvement is small. The sharp fall in services, from 8.2% in FY12 to 6.6% in the CSO projections for FY13, is largely driven by the collapse in exports and halving of government consumption—while the world economy picking up should help exports, an election year means some pick up in government spending. Construction slowing has been a big driver of low industrial growth and has a lot to do with the investment slump. Any change in this, due to the Cabinet Committee on Investment (CCI) process—of the 73 oil blocks which didn’t have defence ministry clearances, over 60 have been cleared with some riders attached—will change growth rates. Posco, to cite another positive development, is looking at beginning construction activity in another 3-4 months as the land acquisition has picked up. If the government sticks to its promise of raising diesel prices by 50 paise each month—it should have raised them yesterday according to the schedule—this will go a long way in reducing the public sector drag on overall savings; as a percent of GDP, these halved in FY12. Corporate investment, which fell around an eighth in FY12, will also pick up if the CCI process works. Power projects will pick up if coal price pooling is cleared and, once the power restructuring package starts working, there will be more money in the system.
Since the slowing means RBI may have another rate cut coming, the trick then lies in the government being more responsive. While there’s no guarantee of that—look at the taxation mess in the news to know this—the FM’s road shows suggests he means business. More so since the current account is totally out of control and FDI contributes just a fourth to financing this as compared to 100% in FY08—this means the government has no option but to be a lot more responsive. Fresh investments will take a while to happen, more so since capacity utilisation is just 72-73% at an all-India level, but apart from the CCI process working a bit, the likelihood of distressed asset sales—the franchisee of the Delhi-Gurgaon expressway lost his entire equity in a sale last week—can’t be a bad thing for fresh investment prospects.