If economic concerns trumped security issues in the Prime Minister’s Independence Day speech, this is because the past few weeks and months have not been kind to the macro economy or its planners. On August 9, the global rating agency, Moody’s, revised downwards its estimate of India’s growth to 5.5 per cent during the current year. That is a level many investment banks and financial institutions — Citi, Crisil, CLSA, among others, had estimated even earlier. Another agency, Fitch Ratings, which recently lowered India’s credit outlook to negative, has said there is a good chance it might be forced to downgrade the country’s sovereign rating in the next 12 to 24 months. Among official agencies, the Reserve Bank of India, in its July 31 policy statement, had trimmed its GDP forecast to 6.5 per cent from 7 per cent earlier. At the same time, the central bank had warned of many downside risks to growth and upside risks to inflation — factors that might well drag India’s economic growth even lower. In the last quarter of 2011-12, the GDP growth rate was a measly 5.3 per cent. The most recent data showed factory output declining sharply by 1.8 per cent in June, driven by a slump in manufacturing. The Index of Industrial Production declined by 0.1 per cent during the April-June quarter.
Despite growing much more slowly than before, some have claimed that India can still boast of being among the fastest growing economies in the world today. Though valid in a narrow sense, such statements miss the point that the Indian economy has been slipping badly and is weighed down by structural factors. In his speech, the Prime Minister underlined the need to grow faster in the interests of national security. India’s economic woes are exacerbated by a combination of domestic and global factors operating in tandem. The continuing fall in export volumes — in July they contracted by nearly 15 per cent from a year ago — and the firming of global oil prices are not good news in the context of a large current account deficit. The very large dependence on short-term capital flows to bridge the CAD points to danger ahead. The rating downgrades will increase risk aversion on the part of overseas investors in India and make external borrowing by the Indian corporate sector costly. Inflation for July has been lower but this good news must be tempered by the fact that the full impact of the insufficient monsoons has not yet been fully factored in. Dr. Singh’s assertion that the economy can grow even faster than the 6.5 per cent clocked last year will sound more credible if it is backed by a robust action plan.