Indian government’s reaction to 5% GDP growth: Surely, there’s been a mistake?

No signs of climbing GDP anytime soon.
No signs of climbing GDP anytime soon.
Image: AP Photo / Rafiq Maqbool
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The Indian economy has, evidently, run out of steam. The second fastest growing country in the world has estimated that the GDP growth for the current financial year is likely to be 5%. This is a 10-year low; the economy had been growing upwards of 8% from 2008. Now, advance estimates from the Central Statistical Organisation (CSO), which accounted for economic activity through November suggests that growth will be far less than what was anticipated.

The government, which was visibly shocked by the surprisingly low number, first reacted by questioning its validity. Montek Singh Ahluwalia, the deputy chairman of India’s planning commission, a body that determines the growth trajectory for the economy said: “I am not certain that whether they (CSO) have done it in a correct way. In the past also, the quarterly (GDP) data was very frequently adjusted.”

Earlier, Ahluwalia’s bosses at the Finance Ministry had revised India’s growth projections down from 7.6% to 5.7%. But even the ministry was not convinced about the 5% projection. It suggested that the months preceding November were the worst for the economy and a simple extrapolation is likely to be erroneous. The ministry said in a statement:

Since then [November] leading indicators have turned up, suggesting some hope that we will end the year on a better note. Also, sectors such as trade and transport, which are related to industry, would also tend to get revised upwards, if growth outcomes are better. We are keeping a watch on the situation. We have taken and will continue to take appropriate measures to revive growth.

Whether 5% is an appropriate estimate or not, there is no doubt in the fact that the Indian economy is off course. Interest rates are high, inflation is high and consumption is low. Companies that invested significantly in expanding capacity during the boom years of 2005-2008 are backing off due to slowing demand. This, in turn is, resulting in higher levels of unemployment, which adds fuel to the vicious cycle of poor consumption. CSO’s GDP estimates are based on projected growth in various sectors: it pegs manufacturing growth at 1.9%, down from 2.7% last year; agricultural growth is projected at 1.8% this year, down from 3.6% last year; and growth in services is down to 6.3 % from 7.4%. Auto sales were down to 4.6% from 12.5% last year.

The more optimistic lot of economists are of the opinion that this indicates that the worst is over for the Indian economy. Even though the government managed to pass the foreign direct investment in retail bill and some other economic measures in its previous session, the general sense is that the policy paralysis of the current government continues. Next year is an election year in India and with an eye on potential coalitions that will have to be structured, the government is unwilling to pass unpopular measures. This, along with the fact that excess capacity will lead to higher levels of unemployment indicate that the revival of the economy will be a slow process.  The central bank is caught between fueling growth and containing inflation. Rates were deliberately kept high in order to counter soaring inflation. In its announcement of credit policy on Jan. 29, the central bank’s head, D Subbarao, dropped key interest rates by 0.25% in order to jumpstart growth. He said he would be keeping the CSO estimate in mind while determining the fiscal policy that will be reviewed in March. Stock markets had anticipated slowing growth and while the market did not collapse on the news, it is now trading at the lowest levels of 2013. The euphoria of the liquidity-fueled rally of the first five weeks of the year has clearly disappeared.

This year, there will be even more scrutiny and expectation from the finance minister on budget day, Feb. 28, the most important date on the Indian business calendar. This is his last chance to jumpstart the economy so that by the time elections come around, there will be a sense of renewed optimism.