Growth crisis deepens

Concrete action on investment and fiscal deficit needed

The Central Statistics Office of the Government of India has released figures for growth in gross domestic product in the second quarter (Q2) of 2012-13, and they do not make for comforting reading. GDP at factor cost grew by only 5.3 per cent compared to the same quarter, between July and September, of 2011-12. In the first quarter, GDP grew by 5.5 per cent — so growth is, by this measure, continuing to slow. Given that growth for the first half of this financial year is at 5.4 per cent, clearing six per cent for the whole year, therefore, seems near-impossible. Indeed, even the Reserve Bank of India’s target of 5.8 per cent seems distant. The lowest growth in a decade, well under six per cent, is far more likely. 

The government’s initial response, through the finance minister, has been to term Q2 growth “disappointing”. But it is only disappointing if you have been living in false hope of a recovery. The truth is quite the opposite: that a recovery needs to be created, not just hoped for. No further pick-up in the fixed investment rate is likely, given the indebtedness of major investors, the stress on banks, or the hole in government finances. Nor can a second-half recovery in agriculture be depended upon. True, the declines in agricultural output in this kharif season have been dramatic — 18.4 per cent in coarse cereals and 14.5 per cent in pulses. Even so, agriculture grew at 1.2 per cent, and imagining that a massive recovery will drive rural incomes or overall growth from that sector is foolhardy. The government should, thus, focus on what needs to be done to ensure a broad-based recovery.

It must be realistic: little can be done in policy terms for exports or even agriculture. Both depend on extraneous factors — and any agricultural reforms will face political hurdles and not show results, in any case, in the short term. However, consumption and investment are a different story. They call out for focused policy intervention. Investment, in particular, needs administrative logjams to be cleared. Recent statements on the subject of big-ticket clearances need to be followed up with action, particularly on land acquisition for projects. Industrial output has been largely flat, the biggest driver of the growth slowdown. This needs to be corrected, through more nimble policy and administrative measures.

The government must also recognise that a slowing economy impacts its fiscal deficit even more adversely than earlier. The Budget estimates of growth for 2012-13, of 7.6 per cent, look almost ridiculous now. Growth will be about two percentage points less; meaning that revenues will be correspondingly lower. A lower GDP number in the denominator also means that the deficit as a proportion of GDP will be even higher than projected, setting off alarm bells for investors. Meeting the target in the finance minister’s “road map”, of a deficit at 5.3 per cent of GDP, will be difficult — unless subsidy reform is carried out immediately.