Gloomy outlook on growth
The recently released GDP growth data for the first quarter (Q1) of 2011-12 should raise concerns about the deteriorating macro-economic situation in the country. GDP growth at 7.7 per cent in Q1 was the lowest since Q3 in 2009, and has declined successively in the last three quarters.
Even the 7.7 per cent was achieved on the basis of a revision of GDP growth in Q1 of 2010-11. On the basis of unrevised data, growth in Q1 of the current fiscal would slip further to 7.2 per cent, below the lower bound of 7.6 per cent forecast earlier by the RBI. Car sales are already in negative territory for both July and August, and this is indicative of the state of the manufacturing sector.
Construction activity has markedly slowed down, with first quarter growth in the sector at a measly 1.2 per cent compared with 5.7 per cent in Q1 last year. Agriculture growth at 3.9 per cent has been a pleasant surprise, but this momentum can hardly be maintained, given the high base.
Services sector has maintained its double digit growth, but with public sector expenditure under pressure and software exports likely to suffer on account of continued weakness in the US economy, it can hardly be expected to grow much faster in the next three quarters.
Exports growth is perhaps the only silver lining, with July seeing a record-breaking 82 per cent growth, despite weaknesses in major global markets. But even the Commerce Secretary has warned that it is futile to expect exports to grow at this scorching pace.
GROWTH DIP LIKELY
With the full impact of increased interest rates on domestic demand likely to be felt in the coming quarters, we should not expect the growth in the next three quarters to be any higher than in the first one. We may well see aggregate GDP growth in 2011-12 at closer to 7 per cent rather than government estimates of 8 per cent, or thereabouts.
While it is true that the Indian economy in 2011 is vastly different from that in the period FY1998-FY2002 when growth plummeted to as low as 1.9 per cent (Q4 of FY2001), it is hardly worth arguing that there is a floor at 7 per cent for GDP growth in India. This would be fallacious and dangerous.
And most importantly, the longer our economic growth is below our potential growth rate of 9-10 per cent, the more we would be losing opportunities for generating more employment, critically needed to absorb some of the 12 million new entrants to the labour force each year. By not maximising our potential and actual growth, we could get on to the dangerous path of rising social and political stress and unrest.
Other components of the macro situation are also worrying. Inflation refuses to come down, despite the RBI having raised interest rates on 11 occasions in the past 18 months! Price data released on September 2 shows food prices increasing by 10.05 per cent for the period ending August 20, with fruits and vegetable (F&V) prices leading the charge. It should be amply clear by now that higher interest rates are unlikely to have the desired impact on people's consumption of fruits, vegetables and proteins, and prices will stabilise only with a stronger supply response.
Unfortunately, the upward pressure in food prices is likely to be construed by the RBI as another signal for raising rates for the 12th time. This will weaken investment, consumer durables and construction demand and adversely affect overall GDP growth, while leaving F&V prices untouched. The spectre of stagflation lurks on the horizon.
On the fiscal front, things look equally bad. Fiscal deficit during April-July is already 55 per cent of the annual budget estimate, compared with only 24 per cent in the same period last year. Total public expenditure has remained at the same level (30 per cent) as in the previous year. But it is important to note that at this level, public expenditure grew by 19 per cent during 2010-11, while it is required to grow only 3.6 per cent in the current fiscal.
It is difficult to visualise sufficient cuts in public expenditure to bring down the growth to 3.6 per cent in the remaining eight months. Revenue receipts seemed to have slipped badly, with April-July showing a collection of only 17 per cent of the estimated annual receipts compared with 35 per cent last year. The worst slippage has been in non-tax revenues, of which disinvestment receipts account for the biggest chunk.
In the four months last year, 85 per cent of the budgeted amount had already been collected thanks primarily to the spectrum sales.
In this year, a mere 18 per cent has been raised in these four months and the prospects for the remaining period are not so bright, given the depths to which the Sensex has plumbed recently. In all likelihood, and unless the government takes the axe to some of the welfare schemes and subsidies, the Budget's fiscal deficit target of 4.6 per cent will be breached.
INVESTMENT PROSPECTSAccording to FICCI's estimates it is more likely to be 5.1 per cent. This will put additional pressure on market interest rates by soaking up liquidity, in a situation where rates are already rising because of RBI's actions. This will do investment intentions no good at all and result in a further decline in the launching of new projects. In short, it is time to take serious stock of the macroeconomic situation and act before growth heads to sub-7 per cent levels in the coming quarters. That should indeed be highly avoidable.