Going by the recent forecasts of many private forecasters, there does not seem to be much hope for the economy bouncing back to a ‘reasonable’ growth trajectory. Recently, Rating agency Moody’s lowered its forecast to 4.5 per cent, a full one percentage point below its earlier 5.5 per cent.
Other rating agencies and banks had already indicated their forecast — all below 5 per cent. Downward revisions to their earlier projections for 2013-14 have been the norm. Is a sub-5 per cent annual growth rate the new norm for India?
How do official and quasi-official estimates of GDP growth for the current year measure up? The government’s estimate, at the time of Union Budget in February was between 6.1 and 6.7 per cent.
In April, the Prime Minister’s Economic Advisory Council (PMEAC) estimated a 6.4 per cent growth rate, right at the middle of the Budget’s range.
In its recent Economic Outlook in September,, it has sharply lowered it to 5.3 per cent
The Reserve Bank of India, always more conservative than other public institutions, forecast 5.7 per cent growth for the current fiscal in its annual credit policy statement of May. It has since brought it down to 5.5 per cent, which is still much higher than the private forecasters.
The Central Statistics Office has not yet altered its estimates for the whole year. The purveyor of official statistics has, however, released the first quarter (April-June) estimate, which shows the economy growing by just 4.4 per cent.
From now on, various factors will determine whether these estimates are credible or not.
The PMEAC has a good track record of disseminating and distributing information on the macro economy. Even though its forecasts in some of the previous years were widely off the mark, its assessment for the current year is one of the most lucid commentaries on current growth trends.
The economy will grow by 5.3 per cent during the current year, with agriculture staging a smart recovery at 4.8 per cent as against 1.9 per cent last year. Industry will expand by 2.8 per cent (2.1 per cent) and services by 6.6 per cent (7.1 per cent).
Assumptions behind estimates
Important assumptions/explanations behind the above estimates are:
(1) Growth during the second-half of this fiscal ought to be much better than the first-half. The PMEAC believes it will happen. Monsoon has been good, and kharif and rabi crops should be plentiful. Rural demand will be stimulated.
(2) Infrastructure, which has received so much attention recently, should, with a lag, bring about an improvement in economic activity from the third quarter (October-December) onwards.
However, given the general stress on corporate balance sheets and the difficulties in raising funds, the pick-up will be more muted than otherwise.
(3) The growth momentum has been pulled down because of two important reasons: currency fluctuations since June has adversely impacted on the policy front, corporate performance and banks as well as financial institutions; and corporate profitability has been eroded, suggesting a slower recovery.
(4) Within the broad category of industry, mining and quarrying continue to be impacted by policy and regulatory issues. The PMEAC projects a modest 0.1 per cent growth, an improvement of sorts over the previous two years when there was a contraction.
(5) Manufacturing growth has been in doldrums. Some improvement is possible in the second-half. Another sub-sector, construction, has comprehensively reflected the slowdown. The government’s commitment to boost infrastructure should help.
The PMEAC’s projection is 5 per cent (4.3 per cent last year). Given that construction is a function of private and public expenditures, the lacklustre investment outlook and the cut in government spending suggest that the Council’s projection may be too ambitious.
(6) Some parts of the services sector, particularly software and related businesses, may improve, but there is likely to be some deceleration in trade, hotels, transport and communications and the financial sector. This is another indication of the economic stress.
In a difficult year, growth projections can be hazardous.