At the outset of the year 2013, India’s worsening macroeconomic parameters are a major cause of concern—current account deficit (CAD) at a record level, the centre's fiscal deficit poised to breach even the revised target, economic growth stuck at a three-year low of 5.3%, industrial production giving a confusing signals on revival front.
As policy-makers looked for signs of economic recovery, many economists think there might be an improvement in the macroeconomic figures in the last quarter of the current financial year, albeit not in a significant way. However, there is almost an unanimity that the Centre might not be able to control its fiscal deficit at the targeted level in 2012-13.
By November of 2012-13, the Centre's fiscal deficit was 80.4% of the budget estimates (5.1% of GDP) and 77% of the revised target (5.3% of GDP), if one assumes the budget projection of 14% nominal growth in GDP.
The government had decided to rein in the fiscal deficit by allowing retailers to marginally raise the diesel prices every month, and to raise Rs. 30,000 crore through disinvestment. The government has so far raised close to Rs 7,000 crore from the stake sale in the public sector units.
“It is hard to estimate what the fiscal deficit would be at the end of this fiscal year, but it is likely to be 5.5 to 5.6% of the GDP.” said Soumya Kanti Ghosh, the director and head of economic affairs and research at FICCI. In 2011-12, the fiscal deficit widened to 5.7% of GDP against 4.6% estimated in the Budget.
Some economists, however think that the government should cut its expenses everywhere possible to rein in the fiscal deficit.
"The government should sharply cut expenses in order to control the fiscal deficit," said Ajay Shah, a Professor at the National Institute for Public Finance and Policy (NIPFP).
Economists believed that the current account deficit (CAD) is more of a problem than the fiscal deficit, and advocate raising the import duties on gold to narrow the CAD. The CAD in the June-September quarter of 2012-13 was at an all time high of 5.4% of the GDP.
Though CAD is a bigger issue than the fiscal deficit because India does not have control over the global situation, CAD has not turned as alarming as it was in the 1991 balance of payments crisis due to capital inflows, felt economists.
Madan Sabnavis, chief economist, CARE ratings said, “In 1991, we had a current account deficit of 3% of the GDP, and that resulted in a crisis. It is not likely to result in a crisis in 2013 because of the huge capital inflows. At the end of the year, the CAD is likely to come down to 4.5% of the GDP.”
However, there was a marginal drawdown of $0.2 billion from forex reserves in the second quarter of the current financial year to finance CAD.
Sabnavis said raising the import duties on gold will lower the demand and imports.
There is a moderate improvement on the inflation front, but that restricted to the wholesale-price inflation only. The wholesale price inflation stood at its lowest pace in three years in December at 7.18% compared to 7.24% in November. On the other hand, the consumer-price inflation which pinches the common man more, rose to a record of 10.56% against 9.9% in November.
This has dampened the earlier widely held expectations that the Reserve Bank of India (RBI) would go for a rate cut in its January 29 monetary review. Any rate cut, if happens, will not be sharp, economists said. RBI governor D Subbarao recently said that a monetary stimulus is unlikely.
Arun Singh, Dun and Bradstreet, senior economist said,"The manufactured articles inflation has come down in December to 4.24% in December. This is a good sign. But, the primary article inflation is still at a high level, and this is cause for worry.”
Economist Ajay Shah too thinks that the RBI is not likely to cut the interest rates in January because the economy has not seen price stability yet. “The job of the central bank is to deliver price stability,” he said.
Anis Chakravarty, an economist with Deloitte said that the diesel price hike will raise prices, but what is likely to happen will be offset by the monetary policy decisions of the RBI. “At the end of this fiscal year, the inflation numbers are likely to remain at 7 to 7.2%,” he said.
However, Ghosh held a different view. He said because the RBI is likely to cut the interest rates by 50 basis points in the January 29 policy review, the IIP numbers are likely to be better in the final quarter of the fiscal year 2012-2013.
The industrial production had contracted by 0.01% in November, though it had registered an 8.2% growth in October. At the outset, it seemed to be a volatile numbers that the Index of Industrial Production (IIP) has always been accused of, but this has always been a trend in pre-Diwali and post-Diwali months.
“We might be able to achieve a growth rate of 5.5% for this fiscal year in the IIP numbers.” Ghosh said.
Industrial production grew by just 1% in the first eight months of the current financial year against 3.8% in the corresponding period of last fiscal.
However, others believe that prospects for a strong revival in growth are bleak in the last quarter of this fiscal year. The slow growth of the economy is attributed to the slowdown in the United States, the Euro Zone crisis and the declining business sentiments in India.
Indian economy grew 5.4% in the first half of the current financial year against 7.3% in the corresponding period of the previous fiscal. The Finance Ministry expects the economy to expand by 5.7-5.9% in the entire 2012-13. For this to happen, the economy needs to grow by 6.1-6.3% in the second half, which seems to be a distant dream as of now.
The World Bank, on the other hand, pegged India's economic growth at 5.4% for this fiscal, which means that the economy will expand in the second half by almost the same pace as in the first six months.
It should be noted here that both the Finance Ministry's estimates of 5.7-5.9% growth and the World Bank's projections of 5.4% expansion would mean that the Indian economy will witness a decade low growth. In 2011-12, the economy grew nine-year low of 6.5%. So, any growth less than that would be a ten-year bottom growth.
Even in the global financial crisis period of 2008-09, the economy grew by a higher rate--6.7%.
Shah finds that macro economic parameters are not likely to improve much in the last quarter of the current financial year.