By Satyajit Mishra
The union budget for 2013-14 accompanied with the release of the economic survey by the Ministry of Finance had refreshed hopes, in March 2013, about the Indian economic growth scenario. However, the Finance Minister stating Indias estimated GDP growth to be 5% for the current fiscal coupled with the slower growth in the third quarter at 4.5% have raised concerns as well. The finance minister isnt alone with the grim forecasts. At the end of January 2013, RBI, in its macroeconomic review of the economy for the third quarter, had also revised Indias GDP forecast to 5.5% in 2013-14 as against 5.7% estimated earlier. The Asian Development Bank (ADB) has also revised Indias growth forecast from 6% to 5.8%, citing the sluggish Indian economy and slow progress in economic reforms.
However, the hope for a better performance has been voiced by many. Moodys Analytics is more optimistic about the growth prospects from next year onwards and their forecast of economic growth in fiscal 2013 is 6.2% compared to 5.1% in fiscal 2012. Even after revision, the growth forecast by Fitch, S&P and NCAER are all above 6%. The Chief of the World Bank, Jim Yong Kim is also hopeful for a growth rate above 6%.
The current scenario presents a mixed picture. It is not clear whether the widely discussed reform measures taken in the latter half of the fiscal 2013 have started paying off or not. The considerable deceleration in growth in services sector and agriculture sector has led to a substantial revision of the GDP for the fiscal. The industrial sector however has had a notable recovery, mainly fuelled by the growth in manufacturing, electricity, gas and water supply.
The continuous depreciation of rupee against dollar during the fiscal 2013 will worsen our current account deficit, especially due to our inelastic import demand for petroleum. Theoretically our export sector should be doing well given our weakened rupee. While the export sector has started picking up recently, it will not be sustainable for long as any benefit from the weakening rupee will be offset by the huge inflation problem in India. The cost of manufacturing continues to rise for local companies. The poor history of underinvestment in ports, roads and other infrastructure continues to add to the problem. A stable currency would always be better for business. Furthermore, the lack of trading partners in healthy economies is making an export led recovery difficult for India. India needs to relax its regulations and build on its infrastructure, quickly, if it wants to capitalize on the rising labour costs in China.
The other major concerns at this juncture are food price inflation and the fiscal deficit. The headline WPI inflation had fallen to 6.62% in January, 2013 but it should be noted that the food inflation still persists at a very high level of 11.88%. More importantly, this inflation has remained consistently high for the past eleven months. It is very unlikely this can be arrested in the near future through improvement in supply side. In the fiscal front, to compensate for the lower revenue at the backdrop of a slowly growing economy, the union government has cut expenditure. The revised estimate of government expenditure is smaller than the budgeted amount (Rs1,430,825 crore as against budgeted Rs 1,490,925 crore) but unfortunately, the components of expenditure reflect that the revised estimate of non-plan expenditure has exceeded the budgeted expenditure while plan expenditure has fallen short of the budgeted amount. This fall in actual planned expenditure compared to the budgeted one might have an adverse implication on the economic growth in a developing country like India and hence, is not at all desirable.
Given these constraints and related concern expressed widely by economists, the Finance Minister cited that though Indias growth rate has slowed, only China and Indonesia have outpaced India in 2012-13 among the large countries. Additionally, amidst the global recession, India was able to maintain its share of GDP (PPP-based) in world GDP over the years. The share has consistently increased from 3.62% in 2000 to 5.64% in 2010 and 5.7% in 2011. It is still to be seen to what extent India can increase this share by addressing her problems and removing roadblocks in the future.