Government target now in line with IMF’s number
At 8-8.5%, the government’s GDP target was always going to be a tall ask given the lacklustre consumer and investment demand, apart from the fact that non-oil exports—a big driver of growth—have contracted for 8 months in a row now. With GDP growing just 7% in the first quarter of this year—after 7.5% in Q4FY15—not surprisingly, the government has trimmed its target to 7.5%. This, though, is still higher than the IMF’s latest forecast where, along with projections for the world, those for India have also been lowered. While India’s projections for FY16 have been lowered from 7.5% in July to 7.3% now, those for the world in 2015 have been lowered from 3.3% to 3.1%—within this, projections for trade growth have been slashed from 4.1% earlier to a mere 3.2% now; this is why India’s exports continue to contract despite the rupee weakening.
While the government is trying to boost capital expenditure, to make up for sluggish private investment, this hasn’t helped much. Between April and August, the run rate for capital spends, at close to Rs 92,000 crore, was somewhat slow compared with the budgeted Rs 2.4 lakh crore, and total spends were up just about 9% year-on-year. While the pace of capital spending by the government could rise, a lot depends upon how fast the Railways is able to achieve its spending targets. The fall in stuck projects has been a source of comfort over the past few months, but data put out by CMIE shows this rose to Rs 9.8 lakh crore for the quarter ended September—the highest since the 1990s. Given the value of stuck projects has been coming off since 2014, this could be an aberration, but with land still hard to acquire, getting projects off the ground isn’t going to be easy. Also, with steel and other commodity prices falling, promoters may not even be interested in completing some of these projects—of the CMIE list, steel projects account for over half of the increase in stalled projects in the September quarter. In this context, the fact that ratings agency Crisil downgraded firms with Rs 2.4 lakh crore of debt in the first half of the year suggests the private sector will be even less able to invest right now—in any case, with high levels of spare capacity, firms are not in any hurry to invest. While the government is still betting on new investments picking up—CMIE shows a large jump in the September quarter, thanks to big proposals from Foxconn—HSBC analysts point out that the experience of 250 global recoveries shows that when financial intermediation is impaired (as it is in India with bank balance-sheets stretched) and credit growth sub-optimal, economic growth is a third lower than during a normal recovery. In other words, growth could be even lower than the 7.5% being talked of right now.