If wishes were horses PDF Print E-mail
Monday, 20 August 2012 00:00
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The Prime Minister’s Economic Advisory Council (PMEAC), on its own admission, has got it wrong, horribly wrong, in the past. In July 2010, and once again in July 2011, PMEAC projected a recovery in the fixed investment rate, and hence a pick-up in GDP growth. As it happened, domestic savings fell from 34.1% of GDP in FY10 to 32% in FY11 and a likely 30.4% in FY12; gross domestic fixed capital formation fell from 31.6% to 30.4% and a likely 29.5%, respectively. Naturally, GDP growth fell from 8.4% in FY11 to 6.5% in FY12 (PMEAC’s FY12 projection, made in July 2011, was an 8.2% GDP growth). So, when PMEAC now turns around and projects a 6.7% growth in FY13 (even higher than that in FY12), it’s only natural to be sceptical. More so when most other private forecasters are looking at a 5.5% GDP growth in FY13.

PMEAC is, of course, correct when it says FY12’s lower base will help boost FY13 numbers, but there is a limit to how much of a lift can be got when, for instance, the first quarter GDP data—out at the end of the month—is likely to be around 5%. Indeed, manufacturing rising to 4.5% and industry at 5.3% for the full year is a bit of a stretch when the first quarter growth was negative. And while PMEAC suggests a convenient examination of corporate results to get a sense of what results IIP should really be generating, there is little doubt that growth in both corporate sales and profits has been trending down for several quarters now. The report suggests IIP underestimates industrial growth as compared to the Annual Survey of Industries, but there have been occasions when the opposite is true—in any case, PMEAC can’t be suggesting using one method one quarter and another in the next. And it is disingenuous of PMEAC to talk of rising steel and cement output as evidence of a turnaround while paying less attention to the 21% fall in sales of medium and heavy commercial vehicles. The larger issue, though, is what happens to both savings and investments since this is what really drives GDP growth. The picture here is a clear one of both falling steadily, and there’s nothing to explain why PMEAC feels all these indices are all set to rise again in FY13. Apart from the sharp fall in corporate sector savings and investments in FY12 that PMEAC documents, it itself points to the sharp fall in government savings as a result of runaway subsidy expenses—FY13’s slower growth will also contribute to worsening overall savings. Ditto for FDI levels where there’s little explanation for why inflows will rise in FY13.

At some places, PMEAC suggests its growth indicators are predicated on the government undertaking serious reforms, at others it suggests the estimates are realistic. So, either PMEAC knows something the rest of us don’t or it is just trying to talk up the market.


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