Just ahead of the Union Budget and the Reserve Bank of India's scheduled interest policy review meeting — both in mid-March — there has been a succession of lacklustre news on the growth front. Although, by no means, unexpected, the bunching of not-so-favourable official statistics in a short time further reinforces the strong perception of a downward drift in the economy.
The advance estimates pegged GDP growth at 6.9 per cent for 2011-12 compared to 8.4 per cent for 2010-11. The Prime Minister's Economic Advisory Council (PMEAC) has projected only slightly higher at 7.1 per cent. It may be argued that growth rates of around 7 per cent are not unimpressive by themselves and do compare favourably with many other countries. However, in India's case, expectations were unnecessarily raised from the beginning of this year: a GDP growth of around 9 per cent was believed to be achievable. It took the government a long time after other official forecasters and almost all private ones to become more realistic about its growth prospects. Such a delayed reaction, for whatever reason, has ill-prepared the government to receive the latest instalments of bad news.
Data released on Monday last showed India's GDP growth at 6.1 per cent for the third quarter of the current fiscal, the lowest in any quarter since 2009. Moreover, each succeeding quarter has clocked a lower rate than the previous ones. At this rate, it will be well-nigh impossible to meet the growth projection set by the PMEAC or even the advance estimates.
The bad news appears to be even worse once the sectoral breakdown of the GDP numbers are analysed. Manufacturing continues to present a bleak picture with just half a percentage point of growth recorded in the third quarter, compared to 7.8 per cent in the same last year. In fact, the sector's performance has steadily declined in the earlier quarters for this year.
A revival in manufacturing alone holds the key to boosting employment and equally importantly for ushering in broad-based-economic growth.
Of particular concerning, manufacturing is the fact that there has been no pick up in the investment rate. Gross fixed capital formation, as a percentage of the GDP, has steadily declined during the first two quarters of this fiscal. At 30 per cent in the third quarter, it is more than two percentage points below what is was a year ago
Mining has contracted for the second quarter in a row. The neglect of this sector will have serious consequences for other crucial infrastructure industries such as electricity. Most disquieting has been the deceleration in services, a sector, which till now has bolstered the overall GDP growth.
Month of policy announcements
The month of March is going to be extremely critical for economic policy announcements. The Union Budget and an interest policy review by the RBI are scheduled back-to-back. Then, there will be the Economic Survey and the Railway Budget. All these, individually as well as collectively, give the broad direction of economic policy. The global environment is still not conducive to growth. Increased global uncertainty in the wake of the eurozone crisis has weakened external demand and has been a principal contributor to declining exports from India. Compared to Europe, the U.S. economy seems to have perked up somewhat but economic growth there is still below potential. Thus, in varying degrees, India's two principal export markets are showing signs of weakness.
Pressure on CAD
An immediate consequence for India is the deterioration in merchandise trade deficit. The widening trade balance, also caused by rising oil prices, puts pressure on the current account deficit (CAD), which, according the PMEAC, is slated to rise to unprecedented levels. The challenge is to encourage foreign institutional investors and foreign direct investors to build a comfortable cushion in the country's external sector. Plenty will depend on the policy stance here. On the one hand, the government has demonstrated pragmatism by relaxing rules for non-resident investment and increasing the cap for external commercial borrowing. But on the other hand, it has not been able to implement big-ticket reform such as multi-brand FDI in retail.
There are other acute policy dilemmas to be faced. For instance, given the urgency of fiscal consolidation, it has been prepared to restore the service tax and central excises to their pre-crisis levels of 12 per cent to yield about Rs.35,000 crore to the Central Exchequer. But with manufacturing in doldrums, such a policy will not be commended.
On the other hand, without a road map for fiscal consolidation, the Indian economy will lose its lustre in the eyes of investors, whose confidence levels are reportedly not high even now.