Reality check for FM PDF Print E-mail
Wednesday, 08 February 2012 00:00
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Growth bottoms out but tough challenges in FY13 Dismantling the growth engine to get a 6.9% GDP growth, the lowest in 9 years if you leave out the global financial crisis year of 2008-09, appears to have been relatively easy, but the question is how do you put Humpty Dumpty together again. Two months into the next fiscal, and the advance estimates for 2011-12 show three clear and disturbing trends. Despite all talk about the robust Indian consumption story, driven largely by rural India, consumption growth has come down from 8.1% in 2010-11 to 6.4% in 2011-12; investment growth is down from 7.5% to 5.6%; and despite the fact that the fiscal deficit will overshoot the target by around a lakh crore rupees, government expenditure has slowed from 7.5% to 5.6%—in terms of contribution to GDP growth, it is down from 9.5% in 2010-11 to under 6% in 2011-12. Call that the power of subsidies if you will. In terms of economic activity, agriculture growth fell to 2.5% despite the high food output, but perhaps FY11’s high growth of 7% is responsible for this. Manufacturing is down to even below the 4.3% seen in the crisis Lehman year, underlining the fact that much of this year’s problem is self-inflicted. Most telling is the fall in mining and quarrying output by 2.2%, as much a testimony to RIL not getting its output up from the KG Basin as it is to Coal India’s recurring problems and the government refusing to open up the area to private investors. The saving grace is that both consumption and investment have bottomed out—consumption growth in H1 FY12 was 5.6% versus 6.4% for the full year and investment was 3.5% in H1FY12 as compared to 5.6% for the full year. FY13, in other words, is likely to be better, but by how much depends on what government does. A lot depends on how investment fares and, at 31.9% of GDP, fixed capital formation in FY12 was lower than even the 33.5% in Lehman year. There is little to suggest the government is moving to clear big projects and the problem with respect to power and coal are far from getting resolved though the couple of meetings in the PMO on the subject have enthused investors, more a sign of just how bad things were than of how things are improving. Telecom may yet improve after the SC judgment, but for now there is considerable policy uncertainty. Housing growth was just 4.8% (5.3% in FY09) and restoring that to decent levels requires sharp lowering of interest rates—that, in turn, means lower fiscal deficits and a lower drag by the government on overall resources available. Eventually, a lot depends on how the FM chooses to read the numbers. Given the fact that his advisers have been talking of an 8.6% potential growth as recently as last month, the mood still looks surprisingly self-congratulatory.


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