Future Indian GDP growth rate: A lesson in reality


The Q2 data on the economic growth rate was announced on Nov 30, 2013. It turned out to be 4.8%. The growth came from a robust 4.6% percent increases in the farm output while the manufacturing sector grew by a measly 1 percent. The following is the set of data for the last 3 years at factor cost (2004 – 2005 prices).

Quarter No.

FY 2011

FY 2012

FY 2013

FY 2014

Q1

8.5%

7.5%

5.4%

4.4%

Q2

7.6%

6.5%

5.2%

4.8%

Q3

8.3%

6.0%

4.7%

?

Q4

7.8%

5.1%

4.8%

?

 

Observations:

  1. Given Q1 Q2 of FY 2014 we need at least 5.4% in the Q3 Q4 quarter to achieve 5% annual growth rate. It is an extra ordinary challenge to get there. More likely, our growth rate will be between 4 to 4.5 per annum for FY 14
  2. There is absolutely dismal growth with the job creation remaining flat. There are nearly 1.2 million cohorts hitting the job market. This data is disconcerting
  3. Since the 3rd quarter of FY 2012 the growth rate has been below 6%. It touched a low of 4.4% in Q1 FY 2014. What will drive the economy to higher growth rate? Let us examine the possibilities.
    1. External growth: This is almost impossible. Euro zone has entered into a recession. Britain is slightly perking up from the bottom. US is on the verge of tapering of QE3. Japan after some recovery has gone back into its shell. China is hoping to achieve a 7 percent growth. This is not going to help India to achieve a higher growth rate
    2. Internal growth: The government of India promised to keep its budget deficit at 4.8% of GDP. The data just announced shows that the fiscal deficit is already at 84% of full year target. This deficit figure is understated and is without accounting for subsidies. The government will have to pay for selling diesel and cooking fuels at prices below cost. This amounts to 47000 crores and will have to be paid next year as the current year budget is exhausted. One should expect the government to take austerity measures to keep the deficit as low as possible. This strategy will not help achieve improvement in the growth rate
    3. The latest inflation data shows 7.0 percent for WPI and 10.1 percent for CPI. One of the RBI governor responsibilities is to manage and control the inflation rate. We could expect 0.25% increase in the repo rate next month. Certainly this will not help the economic growth rate
    4. The continued internal fiscal irresponsibility combined with the global economic slowdown is a double blow for the Indian economic growth rate
    5. Labor productivity is not improving. The gross domestic savings rate is falling because of high inflation. The gross capital formation picture is dismal
    6. The only redeeming feature is the strong Indian stock market. But this is due to FII money. They can always pull out their money without notice. All in all the score card of the Indian economy looks discouraging and bleak. S and P has warned that India’s sovereign rating could be downgraded to junk status next year, if the government fails to revive the stalled structural reforms and faltering economic growth. India currently enjoys BBB minus rating the lowest investment grade

Finally, our government officials are expecting a turnaround in Q3 and Q4 of 2014. They expressed optimism over the emergence of “greenshoots” in the economy. Let us hope that they are correct. Nobody is really comfortable with a doomsday scenario. Lets pray to the almighty to make miracles happen. I am waiting!!!

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