Slow pick-up in India’s GDP growth

February 10, 2014

(Any opinions expressed here are those of the author and not of Thomson Reuters)

GDP estimates by the Central Statistics Office for the 2013-14 fiscal year show an improvement over the previous year. But the extent of improvement is too small for comfort. Possibly, in the final revision, that small margin may disappear or even turn negative.

This year, India’s GDP is expected to be up 4.9 percent from 4.5 percent the previous year. This additional growth has come mainly from agriculture, due to a favourable monsoon. Agricultural growth was three times the previous year. Production of non-food grains (like vegetables and fruits), and animal products (like meat and eggs), did not increase adequately in spite of the inflated demand and will continue to be the main source of inflation.

It cannot be said for certain that the monsoon will be normal in 2014 and, even if it is, growth will be lower because of a higher base this year. We cannot rely on agriculture for GDP growth. It has to come from industry and services.

Both performed badly this fiscal year and there are no indications of significant change in the coming year unless major reforms come through. The Congress-led government failed in this respect. Even the opening up of retail to foreign investment did not come through because the reform was hedged with too many conditions, which foreign investors were unwilling to comply with.

Mining and manufacturing continued with negative growth because of lack of demand caused by unequal inflation. The terms of trade between agriculture and industry changed in favour of the former, weakening demand for industry. This was further accelerated by an increase in interest rates which, in the last three years, was pushed up to 8 percent from 4 percent. Demand declined for houses, cars and trucks, and durable consumer goods bought on credit.

Worse still was investment in industry and infrastructure, private and government. It dropped to 28.5 percent from 30.4 percent of GDP, which held back growth. And the reason for this was a delay in decision-making. The bottleneck was really the ministry for environment and forests. This was realized too late although the clearance process seems to have picked up with a change in the minister.

There is appreciation in the finance ministry about the problem, if not the solution. But there is not much time for the government to change the course of the economy in the next three months. The budget to be presented in February will essentially be a lame duck though the finance minister seems keen to introduce some changes that may incentivize industry. For the present, the stalemate between government and industry will continue.

The recovery can come only after general elections due by May and that too if the new government is committed to growth. Even though growth in most countries, including China, has slowed, it is possible for India to achieve 6 percent growth in the 2014-15 fiscal year if the right reforms come through.

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