Though the government continues to put a brave face, and the rupee has stabilised since the petrol price hike, half-hearted as it was, there is enough out there for the government to be seriously worried about. Few took brokerage firm CLSA seriously when in December, apart from forecasting a 6.7% GDP growth for FY12, it actually forecast a lowering to 6.3% in FY13—CLSA was also forecasting a rupee at 55 to a dollar by December. Sure, FY12 had a slowdown, but conventional wisdom was the upturn had begun in Q4 FY12. A combination of a non-reform budget and an even more anti-investor retrospective tax, a higher-than-expected current account deficit and the steady worsening of the Greece problem resulted in the rupee looking like it was in free fall. And, if this wasn’t bad enough, the dramatically worse industrial production numbers for March really spooked everyone and we’re witnessing what looks like, if you will, competitive downgrading of projections for India’s growth for both FY12 and FY13. Morgan Stanley has lowered FY12 GDP growth from 6.9% earlier to 6.3% now; and for FY13 from 7.5% earlier to 6.8% now. Bank of America-Merrill Lynch has lowered FY12 estimates from 6.9% to 6.7% and from 6.8% to 6.5% for FY13. While Citi will come out with its forecast on May 31, when CSO releases its advance estimate for GDP numbers, it expects Q4 GDP growth at 6%, which means FY12 growth would be around 6.6%.
Investor perception and the value of the rupee are obviously important components of the downgrading of growth estimates, but the essential reason remains what it has been for more than a year—a sharp decline in the savings and investment rates. Theoretically, the investment rate can rise if the government brings in favourable policies (diesel decontrol, FDI in retail, allowing foreign airlines to invest in Indian airlines are some of the ones mentioned today), but if this is not accompanied by a rise in savings rates, it will exacerbate the current account deficit and, hence, the rupee’s value. So, savings are critical—overall savings have fallen from 36.8% in FY08 to 30.4% in FY12, largely due to a sharp fall in public savings from 5% of GDP in FY08 to 1.7% in FY11.
Fixing this, to begin with, needs action on the subsidy front. The action, interestingly, doesn’t have to be a dramatic one-off event. While the government drew flak for raising petrol prices 10% in one go after a gap of 6 months, consider that the NDA changed prices 33 times by tiny amounts—as a result, while crude prices rose 290% during the NDA years, petrol prices rose 48%, diesel 112%, kerosene 258% and LPG 78%. In the UPA years, where crude rose a lower 167 %, on the other hand, petrol prices rose by more at 114%, but diesel rose a lower 88%, and both kerosene and LPG were raised by just 65%. The same holds true of electricity hikes and the reason why states like Tamil Nadu have had to raise rates by 37% is because of years on inaction. If the government realises this, and allows certain basic decisions to be taken routinely, things can improve over a few quarters.