On Friday, the government released data estimating that the economy had grown by 4.4 per cent during the April-June quarter of 2013-14. This is the lowest quarterly rate since the fourth quarter of the crisis-hit year 2008-09. But that is where the similarity ends. Unlike in 2009, when governments and central banks around the world responded to the crisis with massive stimulus measures, the road ahead now presents just the opposite scenario. Events during the current quarter have been hugely impacted by the United States Federal Reserve Board's announcement that it will begin rolling back its liquidity stimulus. Add to that the overall state of the domestic investment climate and the prospects of any recovery of a higher growth rate in the near future appear bleak. In any case, dramatic structural reforms seem required in order to make that transition - failing which, India could be in bigger trouble.
Government spokespersons are pinning their hopes of a second-half recovery on the fact that this year's monsoon was good. In fact, over the past two decades, years in which growth slowed significantly were all years in which the monsoon was bad. Thus, there may be some merit in this claim. However, the general loss of momentum in other components of GDP is worrying. From the supply side, mining declined by almost three per cent year on year, following a decline in the previous quarter as well. Depressed mining activity clearly feeds into other sectors: manufacturing also declined and, strikingly, growth of the very large services segment - trade, transport, hotels and communication - fell sharply from above six per cent in the January-March 2013 quarter to below four in this one. From the expenditure side, investment showed a decline. In fact, the fastest-growing segment in the economy was community, social and personal services, which grew by 9.4 per cent. That segment has a significant share of government services. All this suggests that the private sector is deeply enmeshed in a slowdown. Taking into account all the turbulence in the July-September quarter, there is every likelihood that growth for the full year will be below five per cent, despite the monsoon. If so, this will be the first time since the liberalisation of 1991 that such a low growth rate cannot be attributed to a monsoon failure. The causes are deeper and demand an appropriate response.
But the numbers do offer some silver linings. The rapid deterioration in the trade balance in minerals is a major cause of the current account deficit problem; it appears to be a significant reason for the growth slowdown as well. Quickly putting in place a strategy to reverse this will generate significant macroeconomic benefits. Also, even though investment spending is declining, it remains at a fairly robust level of 32.6 per cent of GDP. With an incremental capital-output ratio of even five, this suggests that growth could be in the 6-6.5 per cent range. Viewed another way, the incremental capital-output ratio now is about eight, which points to extremely inefficient use of capital - thanks to the various well-known bottlenecks in the economy. As and when these are removed, there will be an immediate growth-enhancing effect - and the sooner that they are, the better.
