Who's funding growth? PDF Print E-mail
Thursday, 02 February 2012 17:56
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GDP data show sharp fall in savings/investment

When the RBI Governor talks of the growth momentum decelerating in the context of the sharp deceleration in gross fixed capital formation and, barely a week later, the Chief Economic Advisor says there are reasons to believe India is on a path of cyclical upswing, it’s time to read the data carefully. While RBI pointed out that non-food credit growth had decelerated from 21.3% at end-March 2011 to 15.7% by end-December 2011, the finance ministry’s press release says April-November 2011 credit growth to manufacturing (a smaller universe compared to RBI’s) grew at 9.1% compared to 5.9% in April-November 2010 and 4.8% in 2009—in other words, life’s never been better, for manufacturing at least! It’s unclear why credit should grow the way it has, but the fact is IIP manufacturing in April-November 2011 crashed to 4.1% from 9% in April-November 2010. The finance ministry says core industrial growth, the earliest indicator of industrial performance, grew at 3.8% in December—it actually grew at 3.1% and it fell to 4.4% in April-December 2011 as compared to 5.7% in the same period in 2010.

More worrying are the data in the quick estimates for 2010-11 and what they say about savings and investment levels. After peaking in 2007-08 at 36.8%, the savings rate has failed to reach anywhere close. Indeed, the rising gap between savings and investments, from 1.3% in 2007-08 to 2.8% in 2010-11, are an area of concern from the point of view of the rupee. Savings rates for the economy have fallen from 33.8% of GDP in 2009-10 to 32.3% in 2010-11 (investment levels from 36.6% to 35.1%), we’re told, because of the fall in financial savings of households, probably due to high inflation levels—these fell from R8,35,558 crore in 2009-10 to R7,67,691 crore in 2010-11, a fall not seen in the last seven years for which data is presented. Overall household savings that rose 23.2% in 2009-10 fell to a growth of just 6.7% in 2010-11 while private corporate savings growth fell from 27.6% to just 13.2%. The saving grace in all of this was the sharp hike in public sector savings (that’s government plus PSUs) from R11,796 crore in 2009-10 to R1,30,155 crore in 2010-11. Given that this miracle was almost entirely due to the money got from 3G/BWA auctions—which could get reversed if, given how the government is getting after telcos on 3G roaming, the telcos argue breach of contract and ask for a refund!—it’s unlikely it will occur again in either 2011-12 or 2012-13. Indeed, 2011-12’s fiscal deficit is expected to be R1 lakh crore over the budget and the food security bill could result in a similar mess in 2012-13. Assuming the finance ministry’s right in its path of cyclical upswing, the question is who’s going to be funding the growth.



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