8% growth, here we come PDF Print E-mail
Monday, 14 February 2011 00:00
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The day after the government put out its advance estimate of GDP growth for the year at 8.6%, the perennially optimistic chief economic advisor Kaushik Basu said a 9% growth for 2011-12 was “well within target”. Whether the government believes this, of course, will soon be apparent once Pranab Mukherjee comes out with this Budget on February 28—there is, of course, some room for fudge since the GDP deflator is never explicitly spelt out in the Budget even while giving the nominal GDP numbers for 2011-12.

At this point, though, it has to be said it is difficult to see how Basu arrives at this number. India Inc is in the grip of a huge fear, the government has no time for taking any kind of tough policy decisions, there is virtually no money to pick up in the markets and even a very small sum taken out by FIIs (around $1.5 bn since January) has made the market fall by 15% since the beginning of the year.

And, yes, it does look as if corporate India will continue to suffer some heartburn for a while—Sebi’s order on the RIL insider-trading investigation is expected soon; the CAG report on RIL’s capital expenses in the K-G basin gasfields could be out in a few months; the CAG report on the purchase of planes by Air India will almost certainly raise political temperatures; the Supreme Court will start hearings on the Tata petition against the government on the Sasan power plant next month. The JPC on Raja, almost a certainty now, will ensure the government is put under a new form of pressure every day ….

Data for the first half (April to September 2010) of 2010-11, contrasted with the advance estimates for the year that came out last week, makes it clear we’re in the middle of a slowing. And mind you this is the period before scam season really hit us, so corporate India was still a lot more bullish than it is today. Investment levels (gross fixed capital formation) in the second half of this year (October 2010 to March 2011), even the government projections in the advance estimates suggest, are likely to grow just 2.6% as compared to 14.9% in the year’s first half. Given how it is the surge in investment levels that has driven GDP growth in recent years, it’s obvious why the economy has slowed—as compared to 8.9% in the first half of the year, GDP in the second half is likely to grow at around 8.3%.

As a proportion of GDP, the ratio of gross fixed capital formation (at 2004-05 prices) has fallen from 33.6% in 2007-08 to 32% in 2009-10—while this is projected to fall a bit more to 31.6% in 2010-11, the fall is projected to be exceptionally sharp in the second half of the year. Though it is true the data gets distorted by ‘errors and omissions’, the current data suggests that the ratio of gross fixed capital formation to GDP was 34.7% in the first half of the year and is likely to fall to 29.1% in the second half.

Foreign direct investment, the other leg of overall investment, has also fallen, from $41.2 bn in 2008 to $34.6 bn in 2009 and to a mere $24.0 bn in the first 11 months of 2010. The import numbers also suggest all isn’t as hunky dory as is made out to be—they fell 11.1% in December 2010 over that a year ago, and while there was a fall of 16% in oil imports, non-oil imports fell 9%. Industrial production for December, data out last week, suggests the same moderating of growth story—on a 3-monthly moving average (3mma) basis, Citi India suggests IIP growth has decelerated to 5.5% from around 9% a few months ago and the double-digit levels seen at the beginning of the financial year—there are the usual problems with the indices, but high inflation appears to be hitting household expenditure, which slowed from 8.6% in the first half to 7.9% in the second half.

Investments, of course, can always revive but there are several issues here. Immediately, there is the issue of inflation and managing that. Rising costs of raw materials, we’ve seen, are affecting the growth in sales and profits of corporate India; and the need to increase interest rates by RBI will dampen the investment outlook.

There is then the larger issue of investor confidence which, it is obvious, has taken on a larger than life dimension right now. Banks, for instance, are wary of investing, given what’s happening to their telecom lending and the Supreme Court-ordered probe into it; bureaucrats are certain to be that much slower about taking decisions that are even slightly controversial; though Jairam Ramesh looks a lot more open to granting clearances, the ease with which decisions are made is surely worrying—a Lavassa can be told to stop work at a moment’s notice and legitimate deals like Cairn-Vedanta are being made into a huge populist football.

FII investments are probably the last leg of this story. Right now, FIIs are still bullish since the sums withdrawn are not that large. If the current stalemate on policy continues, and if the US growth story remains on track, FIIs could well take the view that larger exits may be a better idea. The Sensex’s fall means it is now trading at a more reasonable 14.5 times one-year forward earnings, and this is a positive since it means India is no longer as expensive as it was some months ago.

So it’s not exactly crisis time, but some more months of policy paralysis, and things could well start looking different. The onus of ending the policy stalemate, of course, is not just on the BJP—till the time the government indicates it is really interested in cleaning its stables, as opposed to pointing fingers at the BJP, a stalemate seems pretty much par for the course.


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