5% GDP: Slowdown demands belt tightening, growth Budget

India’s slowest growth in a decade could be worse than anticipated, as preliminary data released on Thursday showed the economy set to have grown 5 percent in fiscal year ending next month, underscoring the urgent need for reforms to boost growth.

The RBI’s forecast for 2012/13 had been 5.5 percent growth, while Finance Minister P. Chidambaram had projected growth of 5.7 percent, down from 6.2 percent in 2011/12, but both appear to have been over-optimisic.

The preliminary data dimmed hopes for a mild recovery in economic activity in the second half of the financial year, which ends in March, with the government now projecting economic growth of 4.6 percent between October 2012 and March 2013, compared with 5.4 percent in the first half of the fiscal year.

More from Economy

Inflation likely to be a big focus area for budget 2024, say sources Explained: Will the Bank of Japan break tradition and raise interest rates?

“It is disappointing,” C. Rangarajan, chairman of the Prime Minister’s Economic Advisory Council, said of the figures. “My own estimate is when the full-year data becomes available, it can be revised upward.”

He did not give reasons for his optimism.

The government’s estimate for the fiscal year 2012/13 pegged farm output growth at 1.8 percent, while the manufacturing sector was expected to show growth of 1.9 percent. The services sector, which makes up more than half of India’s GDP, is forecast to slow down to 6.6 percent from 8.2 percent a year ago.

[caption id=“attachment_617823” align=“alignleft” width=“450”] Chidambaram has already ordered spending cuts in welfare, defence and road projects for this financial year. Reuters[/caption]

“These all look a little low to us, but it is the service sector estimate, where high frequency information is most lacking, which is the biggest surprise,” Credit Suisse analyst Robert Prior-Wandesforde said.

The figures will pile pressure on Prime Minister Manmohan Singh’s Congress-led government to unveil a growth-oriented budget on February 28 for the next fiscal year, beginning in April.

FISCAL CHALLENGES

But faced with an arduous task of trimming a swollen fiscal deficit that has put India’s investment-grade credit rating in peril, Singh can ill-afford to boost government spending to prop up growth ahead of a national election due by May 2014.

Chidambaram has already ordered spending cuts in welfare, defence and road projects for this financial year.

According to the GDP estimate, growth in government expenditure is on track to moderate to about 4 percent in 2012/13 from 8.6 percent a year ago.

Economic growth likely eased further to around 4.8 percent in the quarter ending in December, mainly as a result of deep cuts in government spending, a senior official at the statistics ministry told Reuters on Thursday. The GDP data for the December quarter is due on February 28.

Critics warn that at a time of low growth, lower spending risks deepening the slowdown without helping the deficit-to-GDP ratio.

But others argue the government has little option but to tighten its belts. A drop-off in investment, hurting growth, is blamed in part on high public spending that is funded through a heavy market borrowing and crowding out the private sector.

Indian business leaders and foreign investors are pushing Singh to create better conditions for economic growth by fast-tracking stalled tax reforms and making it easier for firms to acquire land for new projects.

STRUCTURAL WOES, SLOWING CONSUMPTION

Structural bottlenecks have restricted India’s growth potential to around 7 percent, according to the central bank, ruining the aspirations India has for the near double-digit expansion needed to provide jobs for a burgeoning population.

Road, power and mining projects worth billions of dollars have been held up for years because of delays in getting multiple regulatory clearances.

Capital investment is expected to slow down to an annual 2.48 percent in 2012/13 from 4.4 percent in the previous year, the data on Thursday showed.

Growth in private consumption is forecast to moderate to 4 percent from 8 percent. This could help keep inflation in check and encourage the Reserve Bank of India (RBI) to cut interest rates further to help spur investments and consumer demand.

The RBI last month cut interest rates for the first time in nine months, trimming the repo rate by 25 basis points. But it also warned that, while halting the slide in economic growth was a priority, it had limited room for further easing unless inflation and a high current account deficit improved by more than expected.

Reuters