Not unexpectedly, given how its projections for FY13 went so horribly wrong, much of the latest report of the Prime Minister’s Economic Advisory Council (PMEAC) is devoted to why it misread the tea leaves—as compared to its GDP projection for FY13 of 6.7%, actual growth is around 5%; and while the PMEAC was looking at a current account deficit of 3.6% of GDP in FY13, the actual number is likely to be around 5% of GDP. Investment levels as well as savings, the PMEAC FY13 review estimates, are not dramatically different from those in FY12. So what caused the sharp collapse in GDP growth, it says, was the sharp fall in the economy’s productivity, or an increase in what economists call the incremental capital output ratio (ICOR). While the ICOR has remained pretty close to 4 in the 3 decades since 1980-81, the computed ICOR for FY12 and FY13 ranges from 5.4 to 11.4 depending on how the ratio is calculated. Which means that, for each rupee of investment, India is getting that much less incremental GDP. While the PMEAC was aware of the rise in stalled projects—currently around R8 lakh crore—when it prepared its FY13 estimates, it says it underestimated its impact. Not only did the stalled project values rise dramatically, this also put an additional strain on India Inc’s balance sheets, and hence its ability to invest further. In this context, the lesson is clear: the Cabinet Committee on Investments just has to clear projects even faster. After taking into account the likely rise in agriculture GDP in case there is a normal monsoon and a minor turnaround in other sectors, the PMEAC arrives at a 6.4% of GDP growth estimates for FY14. Given its FY13 track record, most would treat the number with a bit of scepticism.
But what’s interesting is what the PMEAC has to say after this. Even after projecting a 10% rise in exports and a moderation in gold imports, PMEAC still projects $100 billion CAD in FY14 compared to $94 billion in FY13—that’s 4.7% of GDP in FY14 versus 5.1% in FY13. Financing this level of CAD, as PMEAC points out, requires a quantum jump in FDI levels—to $36 billion in FY14 versus $26 billion in FY13. With the US recovering, PMEAC is looking at portfolio capital of $18 billion in FY14 versus $23.7 billion in FY13. What can upset all of this, PMEAC cautions, is not just another surge in gold imports, or oil for that matter, but a sharp rise in coal imports—in other words, if serious reforms are not made in the coal sector by way of bringing in private players, the CAD could take another knock. For a reduction in oil imports, PMEAC cautions, continuing with price reforms is vital—as The Indian Express reported Monday, the oil minister has put on hold May’s diesel price hike because of the forthcoming Karnataka elections.