Macroeconomic stability not a guarantee to accelerating growth

Even as the situation in Europe causes some nervousness to governments and markets around the world, India appears to be relatively insulated, at least in the early days of the denouement. Meanwhile, there are some positive signs emerging on the domestic front as well. The monthly core sector numbers, which are a potential pre-cursor to the Index of Industrial Production numbers for May, showed that eight key sectors grew by 4.4 per cent year-on-year. Most heartening was the 7.8 per cent growth recorded by coal, substantiating the government's promise to increase the efficiency of the sector in the short term, while waiting for new capacity to be installed. This rate is a significant acceleration over the benchmark of the past few years and, if sustained, will contribute to further easing of balance of payments pressures by reducing coal imports. While the pattern across sectors is quite dispersed, the growth rate is the highest in the past six months. This augurs well for the IIP release later this month.

The other indicator from which some comfort could be drawn is the trajectory of the fiscal deficit. Last year, the deficit at the end of May stood at over 45 per cent of the budget estimate; this year, it is down to 37.5 per cent. Of course, this could still be seen as signalling the possibility of an overshoot and the consequent expenditure compression at year-end. A more positive spin on the number, however, is that the government is living up to its goal of front-loading capital expenditure to the first half of the financial year. While information on specific expenditure heads is not available, some evidence of this pattern comes from the relative progress of Plan and non-Plan expenditure, with the former being taken as a proxy for capital spending. Last year, non-Plan expenditure at the end of May was 18.1 per cent of Budget estimates, while this year it is 15.3 per cent. In contrast, Plan expenditure last year was 10.4 per cent of Budget estimates, while this year it reached 13.4 per cent by the end of May. In fact, on an equal monthly expenditure benchmark, front-loading would mean that the number would actually be higher than 16 per cent, so the government isn't quite on the mark yet. Nevertheless, given the normal pace of approvals and clearances, the acceleration, even if slim, is reassuring.

With the growth revival apparently consolidating and the fiscal situation seemingly in control so far, it is imperative that the government pay more attention and put more muscle behind two enormous roadblocks: infrastructure and, related to this, the asset quality problem of public sector banks. There are, of course, some signs of revival in the roads sector and the coal auctions have been executed as promised, but there is no sense of comfort among the business and investment communities that the constraints are being meaningfully addressed. Bank credit growth and corporate profitability patterns paint a picture of persistent stagnation and the consequent lack of incentives to invest in new capacity. Macroeconomic stability may be here, Greece notwithstanding, but this is merely a precursor, not a guarantee to accelerating growth.