Advertisement

  • News
  • Columns
  • Interviews
  • BW Communities
  • Events
  • BW TV
  • Subscribe to Print
  • Editorial Calendar 19-20
BW Businessworld

2012-13 GDP Seen Growing Just 5%

Photo Credit :

The economic growth projection of 5 per cent for the current fiscal is below expectations and the government will continue efforts to revive the economy, said a disappointed finance ministry on Thursday, 7 February. India's slowest growth in a decade could be worse than anticipated, as preliminary data released by the Central Statistical Organisation (CSO) showed that the economy set to have grown 5.0 per cent in fiscal year ending next month, underscoring the urgent need for reforms to boost growth.
 
It was only on Tuesday (5 February, 2013) that the rating agency Fitch had warned India that reforms needed to be continued if India's economic recovery was to take place.
 
The central bank's forecast for the year had been 5.5 per cent, while Finance Minister P. Chidambaram had projected growth of 5.9 per cent, but both appear to have been over-optimisic. This estimate by CSO is drastically lower than what has been projected thus far by the government and RBI. 
 
The Finance Ministry said CSO's economic growth projection of 5 per cent for the current fiscal is below expectations and the government will continue efforts to revive the economy. "The CSO's growth estimate, no doubt, is below what we had expected it to be. We are keeping a watch on the situation. We have taken and we will continue to take appropriate measure to revive growth," the ministry said in a statement.
 
The ministry, however, expects the final numbers to be better as indicators are showing an uptrend since November.
 
"As per practice, this projection is based on extrapolation of numbers till November 2012. Since then leading indicators have turned up, suggesting some hope that we will end the year on a better note," the Ministry added.
 
The lowest-in-a-decade growth rate could be on account of poor performance of manufacturing, agriculture and services sector.
 
"The reduction in growth in agriculture and allied sector has been on account of rainfall being lower than normal, particular in the month of June-July. In the industry sector, growth has been lower mainly on account of a reduction in growth of manufacturing sector," the Ministry said.
 
Finance Minister P. Chidambaram is said to be putting welfare, defence and road projects on the chopping block in a last-ditch attempt to hit a tough fiscal deficit target by March, risking short-term economic growth and angering cabinet colleagues.
 
According to the GDP estimate, growth in government expenditure is on track to moderate to about 4 per cent in 2012-13 from 8.6 per cent a year ago.
 
Economic growth likely eased further to around 4.8 per cent in the quarter ending in December, mainly as a result of deep cuts in government spending. The GDP data for the December quarter is due on February 28.
 
The cuts will reduce spending by about 1.1 trillion rupees in the current financial year, some 8 per cent of budgeted outlay, or roughly 1 percent of estimated gross domestic product, two senior finance ministry officials and a senior government adviser told Reuters.
 
It is the first time the scale of the cuts and details of where the axe will fall have been made public, with officials revealing startling details about delays to arms purchases and belt-tightening for politically sensitive rural welfare schemes in an election year.
 
 
Critics warn that at a time of low growth, lower spending risks deepening the slowdown without helping the deficit-to-GDP ratio.
 
But others argue the government has little option but to tighten its belts. A drop-off in investment, hurting growth, is blamed in part on high public spending that is funded through a heavy market borrowing and crowding out the private sector.
 
Indian business leaders and foreign investors are pushing Singh to create better conditions for economic growth by fast-tracking stalled tax reforms and making it easier for firms to acquire land for new projects.
 
Slowest In A Decade
"The growth in GDP ( Gross Domestic Product) during 2012-13 is estimated at 5 per cent as compared to a growth rate of 6.2 per cent in 2011-12," according to the Advanced Estimates released today by the Central Statistical Organisation (CSO).
 
In 2002-03, the GDP had grown at 4 per cent. Since then the Indian economy has been expanding at over 6 per cent, the highest rate being 9.6 per cent in 2006-07.
 
"It is disappointing. My own estimate is when the full year data becomes available, it can be revised upward," said C. Rangarajan, the chairman of the Prime Minister's Economic Advisory Council.
 
Despite the downwardly revised forecast, the economy could still grow at 5.5 percent or more for the current fiscal year ending March, he said.
 
He also said the government was expected to meet its revised fiscal deficit target of 5.3 per cent for the fiscal year.
 
"Five percent GDP growth for the full year is more in tune with reality. The industrial sector downturn has extended beyond anyone's expectation," said Rupa Rege Nitsure, chief economist, Bank of Baroda, Mumbai.
 
The data will pile pressure on Prime Minister Manmohan Singh's Congress-led government to unveil a growth-oriented budget on February 28 for the next fiscal year, beginning in April.
 
Unfortunately for Singh, with a national election looming in 2014, his government can ill-afford to indulge in populist schemes and expensive projects that would handicap efforts to lower a fiscal deficit targeted at 5.3 percent of GDP this year.
 
The government's advance estimate for the fiscal year 2012/13 shows that farm output is expected to grow 1.8 per cent, while the manufacturing sector is likely to grow 1.9 per cent.
 
According to Thursday's data, capital investment is expected to slow down to an annual 2.48 per cent in 2012-13 from 4.39 per cent in the previous year
 
Structural bottlenecks have restricted India's growth potential to around 7 percent, according to the central bank, ruining the aspirations India has for near double-digit expansion needed to provide jobs for a burgeoning population.
 
Business leaders and economists have called on the government to make it easier for firms to acquire land for new projects and carry out tax reforms to boost economic growth that has been stuck around 5.5 per cent for the past three quarters.
 
Road, power and mining projects worth billions of dollars have been held up for years because of delays in getting multiple regulatory clearances.
 
To help revive the economy and spur investments, the Reserve Bank of India (RBI) last month cut interest rates for the first time in nine months, trimming the repo rate by 25 basis points.
 
But the RBI also warned that while halting the slide in economic growth was a priority it had limited room for further easing unless inflation and a high current account deficit improved by more than expected.
 
The slowdown has hit government revenues, leaving New Delhi scrambling for ways to cut its fiscal deficit to avert a downgrade in its sovereign credit rating to junk bond status.
 
Forced to tighten belts, Finance Minister Chidambaram has targeted spending cuts in welfare, defence and road projects for his upcoming budget.
 
Shybhada Rao, Chief Economist, Yes Bank said: "The imputed growth for second half FY13 is at 4.7 per cent. In our opinion, it is likely to be revised upward.
 
The main reasons for this considerable slowdown is a sharp correction in services at 6.6 percent, led by trade and finance. The base effect in Q4 is positive, despite which, the numbers are projected lower which implies sharp sequential worsening of economic activity.
 
We have been anticipating marginal improvement in Q4 on the back of a small pick up in investments."
 
Upasna Bhardwaj, Economist, ING Vysya Bank said: "While the slowdown in overall GDP estimates have been widely expected, the slowdown in services, particularly the trade, hotels, transport, communication category has been sharper than anticipated.
 
Moreover, the sharp slowdown clearly points towards continued slack in consumption demand, which is expected to keep the core inflation under check going forward".
 
Phani Sekhar, fund manager, Angel Broking said: "It might have small impact but would not impact much as this fiscal year is almost over. People are focusing on next fiscal year. It'll be interesting to see when actual data comes if there is any structural driver that is lowering GDP numbers and whether rate cuts can prevent that."
 
A Prasanna, Economist, ICICI Sec Primary Dealership pointed out: "The estimate seems to be on the lower side. It is surprising that construction sector is estimated to slow sharply in the second half. There is some concern that the drastic slowdown in government spending could affect October-March GDP data.
 
Even then, I expect this advance estimate to be revised upwards. I think we will end up closer to RBI's estimate of 5.5 per cent."
 
Exports have been continuously declining, non-food credit growth is slowing while agricultural sector performance has also been sub-optimal.
 
After the government started showing a firm resolve to put things in place in mid-September, the series of data that has been released is also reflecting sustained deterioration across various growth indicators."
 
Structural Woes, Slowing Consumption
Structural bottlenecks have restricted India's growth potential to around 7 per cent, according to the central bank, ruining the aspirations India has for the near double-digit expansion needed to provide jobs for a burgeoning population.
 
Road, power and mining projects worth billions of dollars have been held up for years because of delays in getting multiple regulatory clearances.
 
Capital investment is expected to slow down to an annual 2.48 per cent in 2012-13 from 4.4 per cent in the previous year, the data on Thursday showed.
 
Growth in private consumption is forecast to moderate to 4 per cent from 8 per cent. This could help keep inflation in check and encourage the Reserve Bank of India (RBI) to cut interest rates further to help spur investments and consumer demand.
 
The RBI last month cut interest rates for the first time in nine months, trimming the repo rate by 25 basis points. But it also warned that, while halting the slide in economic growth was a priority, it had limited room for further easing unless inflation and a high current account deficit improved by more than expected.