Another data surprise

Once again, gross domestic product (GDP) data has thrown up a surprise for economic forecasters. CSO’s advanced estimates peg 2012-13 GDP growth at five per cent, against the general consensus of 5.5 per cent. Advanced estimates are subject to revision and, therefore, should be taken with a pinch of salt. GDP growth for 2009-10 was recently revised up to 8.6 per cent, against the advanced estimate of 7.2 per cent.

Nevertheless, today’s estimates underscore the prevailing weakness in India’s economic environment. Overall GDP growth and private consumption growth are at a decadal low. While agricultural growth was expected to slip because of sub-normal monsoons, the sharp dip in non-agricultural growth was unanticipated, and is indeed a cause for concern. Industrial growth (3.1 per cent) and services growth (6.6 per cent) have fallen to 12 and 13-year lows, respectively. Service sector growth, apart from the weakness in the manufacturing sector, has been dented by a pull-back in government spending. Manufacturing growth, which has been plagued by supply-side bottlenecks, has slipped to its lowest in the last 14 years. This should act as a wake-up call for policymakers, intending to raise the sector’s share in GDP to 25 per cent over the next decade from 15.2 per cent at present.

If monsoons are normal, a cut in interest rates and pre-election spending are expected to provide a fillip to GDP growth. The lift in growth will essentially be consumption driven, which will result in improved capacity utilisation rather than capacity creation. We do not expect any noteworthy revival in investments in 2013-14, as the impaired investment pipeline will recover only when a favourable investment climate is created and maintained. The process started in 2012 with the announcement of reforms. A lot of follow-up and hard work in terms of implementation of already announced measures will be critical for reviving investments and ensuring a sustainable upturn in growth.

The author is Chief Economist, CRISIL