India’s economy is growing at 7%—but it’s not good enough

The going gets tough.
The going gets tough.
Image: Reuters/Rupak De Chowdhuri
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India’s economy grew at 7% in the first quarter of the 2016 financial year.

Compared to global peers, the growth seems quite something for Asia’s third largest economy. But it doesn’t really meet domestic expectations. After all, prime minister Narendra Modi wants to take India’s economy on the double-digit growth trajectory.

But such ambitious growth targets—India’s finance ministry expects GDP growth of at least 8.1% for the entire year—are perhaps looking somewhat untenable. The all-important monsoon rains haven’t entirely delivered, key reforms are hanging fire and India’s power sector looks like it’s in a mess.

“Perhaps expectations are getting ahead of themselves at this stage,” Jyotinder Kaur, chief economist at HDFC Bank, told Reuters. ”There’s a lot of emphasis that’s being put on the opportunities that lie ahead for India and not too much attention is being paid to the challenges that remain today.”

“Overall the message is that growth is still weak,” Prasanna Ananthasubramanian, chief economist at ICICI Securities Primary Dealership, told Bloomberg.

Credit ratings agency Moody’s has already lowered the full year GDP growth estimate for India to 7% owing to a below normal monsoon rainfall. Skymet—India’s largest private weather forecaster—has declared that the core monsoon months have come to an end and rainfall deficiency across the country currently stands at 12%.

Moody’s also outlines a drop off in the government’s reforms pace as a significant risk. In his 15 months in power, the Modi government has not yet announced any “big-bang reforms” as promised, and domestic investment is yet to pick up. A proposed land acquisition legislation has been withdrawn, while the goods and services tax is stuck.

Electricity woes

Meanwhile, India’s power sector is spluttering.

The electricity, gas, water supply and other utility services industry saw a significant slowdown in growth. It’s gross value added (GVA)—the measure of the value of goods or services produced by a sector—rose 3.2% in last quarter, compared to 10.1% growth in the same period a year ago.

“The dismal electricity sector performance pulled down first quarter industrial growth to 6.5% from 7.7%,” Devendra Kumar Pant, chief economist at India Ratings and Research, a credit ratings agency and a unit of  Fitch Ratings, said in a note.

Another set of data released on Aug.31 showed that core sector growth fell to a three-month low in July with electricity generation growth slowing to 3.5%, compared to 11.8% a year ago.

But the country’s coal and power minister Piyush Goyal is promising the moon. Goyal is confident of doubling the electricity generation capacity in the next seven years and wants to provide electricity to every Indian.

India’s power sector has been a mess as power generating firms are burdened with huge debt. Low demand is adding to the woes. In fact, in the 2015 financial year, the country saw the lowest plant load factor—the ratio of the actual electricity generated at a plant to the maximum electricity that  can be generated—in about 15 years.