Sub-5% FY14 GDP growth means govt has to cut spend
Finance minister P Chidambaram, who astounded most when he managed to contain FY13’s fiscal deficit despite the dramatically lower GDP growth than originally projected, needs to pull out another rabbit from his hat in FY14. While growth targets are once again looking dicey, the bigger problem is that the growth collapse has taken place even while government expenditure has grown at its fastest in the last 7 quarters. Had government expenditure not risen by 10.5% in the quarter, Q1 GDP would have risen by just 3.7%, not the headline 4.4%. And the 4.4% itself, it is worth keeping in mind, was the worst in the last 16 quarters. Industrial production, if you look at the supply side, was down to a 17-quarter low and contracted 0.9% in Q1. In terms of the demand side, private consumption growth slowed to just 1.6%, the lowest in 33 quarters, which is when the new base was first used—given that even FMCG companies are seeing flat volumes, the number is ominous.
Investment continued to collapse, and contracted 1.2% in Q1, with few expecting it to pick up anytime soon. Even the Prime Minister, whose job it is to remain optimistic, said he expected the impact of the clearances given by the Cabinet Committee on Investments to start kicking in only in Q3FY14. Whether investment picks up, of course, depends on a lot of things. For one, with real interest rates at 9% (if you use the GDP deflator), interest costs are way too high. Two, with most of India Inc highly leveraged, it simply doesn’t have the wherewithal to fund aggressive expansion. A recent report by Credit Suisse, titled House of Debt Revisited, points to how several top infrastructure firms have an interest cover—EBIT to interest payments—of well under 1. Add to this, the government’s lethargy over clearing big oil/gas exploration projects of companies like Cairn and RIL-BP—indeed, in the case of RIL, the oil regulator has all but asked the company to leave its NEC25 fields which had a $3-4 billion capex plan, and the government continues to send out mixed signals on whether the higher Rangarajan-based price would be available to the company for a long time. And, as Axis Bank economists point out, there will be an inventory drag down in the next few quarters, so this will also lower the GDP growth impulse—as compared to an average 2.3% FY12 average, the share of inventory stock rose to 3.8% of GDP in Q4FY13 and so needs to be reduced.
The finance minister achieved the FY13 miracle by a dramatic R60,000 crore compression in expenditure. Given that, in just the first 4 months of the fiscal, the government has already managed to spend 63% of the year’s fiscal deficit target—the corresponding number in FY13, at this time of the year, was a lower 51.5%—it probably needs to do the same now. But were this to happen, the economy would slow down further, endangering the year’s GDP, and hence tax collections, even further. Any further slowing of GDP, on the other hand, could risk greater FII outflows from the equity market or higher spreads when ECBs are rolled over by India Inc—that puts a strain on an already strained BoP. In which case, instead of just reiterating the fiscal deficit target is a red line that can’t be breached, the finance minister needs to start spelling out his game plan in a bit of detail. More so since, with Coal India’s blackmail seeming to work, the government’s divestment plan is also in jeopardy.