India's economic growth may trip to a decade low during 2012-13, in case it falls below 6.5% witnessed in the previous fiscal--which is widely expected now, even by the government itself. Even in the global financial crisis period of 2008-09, the growth was higher-- 6.7%.
But in 2008-09, the government had a luxury to provide stimulus to the industry. The total cost of these measures came at around Rs 1.86 lakh crore, that had widened the Centre's fiscal deficit to six%, more than double of 2.5% estimated in the Budget. Besides, RBI had cut repo and reverse repo rate aggressively to provide monetary stimulus.
As industry now clamours for rate cut by the RBI, the central bank continued to keep an eye on high inflation, which stood at 7.45% in October.
This, coupled with tough global situation, accentuated by the Euro zone plunging into recession, led to lacklustre investment by private players. The investment rate in the economy stood as high as 38.1% of GDP in the pre-crisis period of 2007-08, which came down to 34.3% in the crisis period the following year. Rising briefly to 36.9% in 2009-10, it fell drastically again to 34.7% the next year and stayed there in 2011-12.
This fiscal, it is projected to rise to 35.3%. However, in the first quarter of this fiscal, fixed investment rate rose just 0.65% against 3.6% in the previous quarter, and the high of 14.88% in April-June of 2011-12.
In this scenario, when private sector is not forthcoming with investment, will the government bail out the industry as it did in 2008-09?
Government can provide booster dose, if it has a healthy exchequer. Already, no disinvestment happened so far against estimated Rs 30,000 crore that it is expected to fetch to the kitty, there is question mark over Rs 40,000 crore from spectrum sale for 2G services. And if the economy slows, tax receipts will also fall short. The Kelkar committee had expected Rs 60,000 crore of shortfall from taxes compared to Rs 7.71 lakh crore in this fiscal. However, this was a worst case scenario.
It is ultimately the government that can borrow at the lowest possible cost. But, then government borrowings are already pegged at Rs 5.70 lakh crore this fiscal, constituting around 5.6% of estimated GDP. The figure stood at roughly 5.7% last fiscal as well. The continued high spending borrowings by the government would crowd out whatever little money is left for private investment.
Besides, higher government borrowings would be necessitated if it goes for extra expenditure to pump prime the economy. The Centre's fiscal deficit was estimated at 5.1% of GDP in the Budget. Realising that it is difficult to meet this target, the Finance Ministry revised the target mid-way to 5.3%. Even this, many doubt, will be met and peg it at anywhere between 5.8% to 6% of GDP.
As per the Keynesian theory, government should spend and cut taxes to spur growth when economy slows down, to perk it up.
But, when fiscal deficit is already as high, how can the government play around with its exchequer?
"The government clearly does not want to spend today, as there is pressure to contain the fiscal deficit. So, the Keynesian theory may not work here," said Madan Sabnavis, chief economist, CARE Ratings.
Widening fiscal deficit may not only stroke inflation, it would also prompt rating agencies to cut sovereign ratings of India, which if happens would slow down FDI and FII inflows in the country.
These inflows are required to finance rising current account deficit (CAD). CAD touched a record level of 4.2% of GDP last fiscal. Though, it is expected that CAD might be lower than this level, in the first quarter of this fiscal it was 3.9% against 3.8% in the corresponding period of last fiscal, even as it was largely due to exchange rate movement.
It is a chain of inaction on all fronts. Investment-led growth seems out of question as a vicious cycle emerges here- high inflation is reducing purchasing power of households, private sector not investing due to lack of demand plus high interest rates, RBI not cutting rates as it expects government to take action on fiscal front as inflation is high, government unable to spend due to widening fiscal deficit, and so on.
“There is a sqeeze from all ends”, said Sabnavis.
Somebody will have to break this cycle, be it RBI by cutting rates or public sector units sitting on cash pile up of over Rs 2 lakh crore. But RBI measures will have a lag effect, while investments by public sector units will not come immediately.
"Public Sector has cash, but investment from there takes time," D K Joshi, chief economist with Crisil said.
India's economic growth refused to perk up. It stood at a mere 5.5% in the first quarter of this fiscal against 8% in the corresponding period of last fiscal. A quarter before—Q4 of 2011-12—GDP grew just 5.3%. The government now expects that the economy would do better in the second half.