5 Or 5.5%? Growth Debate On

The country's slowest growth in a decade notwithstanding, the Finance Ministry expects economic growth to be 5.5 per cent or more in the current financial year.

FinMin said on Friday, 8 February, 2013, the CSO has underestimated GDP growth rate for current financial year and was confident that economic expansion will exceed 5.5 per cent.

"It is likely that the advance estimates of 5 per cent will be revised and the final estimate will be closer to the government's estimate of a growth rate of 5.5 per cent or slightly more," the Finance Ministry said.

The Central Statistical Organisation (CSO) has "probably underestimated" the growth for the current fiscal and estimates are likely to be revised upwards in the final projections, the ministry said in a statement.

In advance estimates for 2012-13, the CSO has projected economic growth rate of 5 per cent, the lowest in the decade. The finance ministry said CSO's advanced estimates have often been revised either upwards or downwards because it takes into account the data till November or December.

But the market and the rupee meanwhile has gone on a downward spiral. The rupee fell the most in over a month on Friday, 8 February, 2013, extending its losses for a third session, as continued weakness in local shares and prospects of a worse-than-expected slowdown in the economy weighed down the currency.

Sensex, Nifty Down
Local stocks declined for a seventh successive session, its longest losing streak in over a year, raising concerns about the future of continued fund flows into now expensive equities. The Sensex fell for a seventh session on Friday to the lowest close this year.

During the week, the BSE fell 1.5 and NSE lost 1.6 per cent, posting their biggest weekly losses since September 1, as the government's weaker -than-expected GDP growth forecast of 5 per cent on Thursday disappointed the market.

Exports, which account for one-fifth of India's gross domestic product, fell for eight consecutive months up to November but December trade data showed the pace of contraction was slowing.

All this has put a greater pressure on the government just before the Union Budget 2013, already buffeted by rising inflation and fiscal deficit coupled with slowing economic growth.

Since late last year the government has been introducing a slew of reforms to support the slowing economy, including cutting fuel subsidies, hiking rail passenger fares and opening the retail sector to foreign investors.

Still, investments have shown little sign of increasing. Capital goods production, a measure of investments in factories, shrank 4.7 percent in November, having grown just once in the eight months until then.

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"The fall in industrial production has bottomed out in the final months of 2012 but will not pick up at a sharp rate, it will only be a very gradual recovery," said Aman Mohunta, an economist at Nomura.

Deutsche Bank analysts also think that despite the deficit, the worse may be over for the Indian economy and a credible path toward fiscal consolidation could well be on the cards. The FY12-13 fiscal deficit, which was rather precarious just a few months ago, now seems to be on track to be no more than 5.5 per cent of GDP. This fiscal "bottoming out" has taken place on the back of petrol and diesel subsidy reductions and substantial holding back of plan (or capital) spending. Despite worries about the growth implications of a sharply reduced capital spending, the analysts are nonetheless inclined to assign high weight to the government's claim that durable fiscal consolidation is taking place. Some breathing room is expected this year also on the interest rate front as RBI seems to be in a position to lower borrowing costs and thus imrove liquidity situation.

Sandesh Kirkire, CEO, Kotak MF, thinks with India’s GDP growth rate regressing to a 10-year low, the upcoming Union budget would be excessively important in salvaging the situation. The 25 bps repo rate cut in Jan-13 has set the tone for encouraging capital formation and investments. However, the moderation in the government borrowing is necessary for the commercial sector to raise the needful resources at viable cost. Therefore a serious approach to fiscal discipline is a must. Moreover, the simplification of tax, trade and investment procedures would also be helpful in re-igniting the growth engines of the economy.

Rupee Performance
So far in 2013, the rupee has been the second best performer in Asia driven mainly by foreign fund inflows into Indian stocks which have already crossed $6 billion.

Most recently, the Indian government netted Rs 11,500 crore by selling shares in NTPC with more than half the bids coming from foreign investors.

But, the country's economic growth remains a concern after a government projection estimated economic growth in the fiscal year will be worse than expected.

The government said the country's slowest growth in a decade could be much worse than earlier projections. Preliminary data released on Thursday, 7 February  showed the economy set to have grown 5.0 per cent in the fiscal year ending next month, underscoring the urgent need for reforms to boost growth.

The euro's weakness also hurt the rupee. The common currency hovered near a two-week low on Friday after the European Central Bank chief hinted at concern about the impact of the currency's recent strength on the economy, in remarks that analysts said went further than they had expected.

"The global dollar strength and stock weakness is hurting the rupee. I do not see any fresh inflows till the budget. That will keep the rupee in a 52.75-53.90 range," said Sudarshan Bhat, chief forex dealer at Corporation Bank.

The partially convertible rupee closed at 53.50/51 per dollar, versus its previous close of 53.22-23, down 0.52 per cent, and its biggest daily percentage fall since Jan 4.

It earlier fell to 53.6525 in the session, its lowest level since January 29. It was also the rupee's first weekly fall after four weeks of gains.

The rupee will strengthen about 1 per cent to 52.50 in the next 12 months, a Reuters poll showed.