A day after outgoing Reserve Bank of India (RBI) governor Duvvuri Subbarao did some plain speaking at his last public lecture before demitting office, saying much of the problems currently plaguing the economy actually lay at the government’s door came a big shocker: proving many estimates wrong, the first quarter gross domestic product (GDP) figure for FY14 came in at a lower-than-expected 4.4 percent. The previous quarter saw GDP grow 4.8 percent.
Ironically, a few hours before the GDP figures were released, Prime Minister Manmohan Singh, who has been at the receiving end for some time from both the Opposition and the economist fraternity for his government having botched up on the economic front, had made a detailed speech in Parliament, making a rather feeble attempt to explain the current crisis. The PM took pains to explain that the economy was fundamentally sound and that the rupee’s sharp fall was on account of external factors.
However, while the PM said the first quarter growth numbers would probably be ‘relatively flat’, what came in Friday evening was a figure which pointed to the crisis India finds itself in. With GDP growing at just 4.4 percent in the first quarter, the manufacturing sector in limbo and no real reforms likely from the government thanks to elections being round the corner, the picture seems pretty bleak despite the PM’s assurances and Finance Minister Palaniappan Chidambaram’s 10-point economic revival plan announced earlier this week.
Doomsayers’ scenario? Hardly. Consider the breakdown of the GDP figures for Q1. Manufacturing growth was at -1.2 percent and mining and quarrying at -2.8 percent, reflective of the continuing crisis in these areas. Agriculture, forestry and fishing grew 2.7 percent, providing some relief, while electricity (3.7 percent) construction (2.8 percent) and trade, hotels, transport and communication grew 3.9 percent during the quarter.
The one big area which saw growth was financing, insurance, real estate and business services which grew 8.9 percent over the first quarter of the previous fiscal.
Private final consumption expenditure (at constant prices), on the other hand, was estimated at Rs 8.51 lakh crore, just a shade higher than the previous fiscal’s Q1 figure of Rs 8.37 lakh crore, while gross fixed capital formation stood at Rs 4.57 lakh crore in Q1FY14 against a higher figure of Rs 4.63 lakh crore in the same period the previous fiscal.
Officialdom, however, continues to maintain its optimism that the second half of the fiscal will bring in better figures. The Chairman of the Prime Minister’s Economic Advisory Council C Rangarajan, for instance, told CNBC-TV18 immediately after the dismal figures came in, that he expected growth to pick up in the second half once the trend in manufacturing was reversed.
Conceding that the Q1 figures were lower than expected Rangarajan said agriculture growth for the full year was expected to be around 4-5 percent on the back of a good monsoon, and that the projects by state-owned firms were also expected to boost manufacturing from the second half of the fiscal.
In a desperate bid to boost investment activity and bring the economy back to the growth path, the Cabinet Committee on Investments (CCI) had, earlier this week, cleared a staggering Rs 1.83 lakh crore worth of projects – both in the power and infrastructure sectors.
The rupee and the immediate context
The dismal Q1 growth numbers are likely to impact the rupee once again, after the RBI’s efforts over the past couple of days managed to bring back some semblance of respectability to the battered currency. Analysts, however, reckon that the second quarter will be severely impacted owing to the sharp fall in the currency and the movement in yields, and therefore few are expecting better numbers.
For now, it is clear that with the Food Bill and the Land Acquisition Bill being pushed through the United Progressive Alliance (UPA) government, despite the economic crisis, is getting election-ready. That, for a number of economic observers, does not spell great news as far as the economy is concerned.
For now, while the policymakers at North Block maintain that the second half growth figures will finally shore up the full year GDP number, everything hinges on whether the manufacturing sector can reverse its declining trend and whether the projects which have been cleared actually begin revving up investment activity. Until then, there’s little chance of the current crisis of confidence abating.