Marginal growth in GDP is quite challenging for the new dispensation that promises to boost economy and create more jobs, reports Team IFM
New Delhi, June 5: India’s economic growth picked up marginally at 4.7 percent for 2013/14, which marks the second straight year of below 5 percent growth and the worst slowdown in 25 years, putting pressure on pro-business Prime Minister Narendra Modi to pull the economy out of its current rut.
Hurt by a contraction in the manufacturing and mining sectors, Asia’s third largest economy posted fourth quarter growth of 4.6 percent from a year ago, according to a release by the Central Statistical Office. Analysts in a Reuters poll had put it at 4.8 percent.
For the quarter under review, growth in gross domestic product (GDP) remained unchanged from the previous quarter, although GDP expanded 4.7 percent in the full fiscal year, compared with the decade-low 4.5 percent registered in the previous period.
The 4.7 per cent annual growth proved slower than an official estimate of 4.9 percent, but higher than 4.5 percent a year earlier, official data showed.
With business awaiting an investment-led turnaround in the coming months, reviving growth poses an immediate challenge to the new government that was formed by the first single-party parliamentary majority in 30 years. But the massive mandate puts Prime Minister Modi in a position to take politically sensitive decisions such as reducing subsidies and hastening project approvals.
Getting stuck in less than 5 percent growth would be pathetic for an economy that posted almost double-digit expansion until a few years ago and was considered one of the key drivers of the global economic recovery.
SOME KEY SECTORS FALTER
According to official data, agricultural output was up 6.3 percent in the three months to end-March from a year earlier and construction gained 0.7 percent. The manufacturing sector slipped 1.4 percent and mining went down a tad at 0.4 percent.
The budget deficit for the fiscal year to end-March was 4.5 percent of GDP, smaller than the 4.6 percent target and lower than the 4.9 percent a year ago.
Policy-makers must work hard to make regulations more investor-friendly, Bloomberg quoted Central Bank Chief Raghuram Rajan as saying in a speech at the Institute for Indian Economic Studies in Tokyo. He pointed out that the Central Bank was committed to bringing down inflation and keeping it low.
Mizuho Bank Ltd expects the Indian monetary authority to increase borrowing costs towards the end of the current calendar year and, possibly, again early next year.
Morgan Stanley and Citigroup Inc. predict that GDP will grow at a four-year high of 6.5 percent in the fiscal year to end-March 2016, faster than their previous forecasts of 6.2 percent. This, however, compares poorly with the nearly 8 percent average posted last decade.
“Inflation will certainly come off the peak but it will remain sticky and still not of great comfort for the RBI [Indian Central Bank],” Bloomberg quoted a senior economist at Mizuho Bank in Singapore as saying. “So we are not pretending that we are going to 9 percent growth in a hurry.”
CHALLENGES GALORE
The new government is faced with the challenge of generating enough jobs for the 10 million young Indians who join the country’s workforce every year. It reckons that the economy has to post at least 8 percent growth a year to avert a severe unemployment situation.
The single-party government has spawned hopes of an economic revival and attracted copious capital inflows, triggering a rally in the country’s financial markets. The new government is seen to take a lot of development decisions the likes of which were stuck in the earlier regime’s multi-party gridlock.
Bullish investors see in this the beginning of the strongest bull market. The Sensex, 30-share index of the Bombay Stock Exchange, is already the best performing equity index in Asia this year. The rupee, too, has hit an 11-month high to the dollar.
“We are not yet able to see…how the economy will grow but certainly the mood is upbeat,” Reuters quoted A.M. Naik as saying. He is chairman of the country’s biggest engineering firm Larsen & Toubro. Naik expects growth to pick up to 5.5 percent this fiscal year.
In fact 93 percent of the company chiefs polled has said they are looking forward to a substantial improvement in the economic situation in the near term. India’s industry body, Federation of Indian Chambers of Commerce and Industry conducted the poll.
“It is likely that infrastructure projects which have been held up for a long time…will hopefully begin to move,” Naik said. “We will see the impact of it more like in August, September, because it takes time for things to move.”
As things stand, capital investment, which contributes nearly 35 percent to India’s economy, shrank 0.1 percent annually in the fiscal year to end-March. According to CMIE, an economic think tank, projects worth US$105.1 billion, the highest in nearly two decades, were put on the back burner last year due to bureaucratic red tape.
Modi, who speeded up implementation of infrastructure projects and stimulated manufacturing as Chief Minister of the western state of Gujarat, is seen to repeat his feats at the national level. Infrastructure and industrial projects worth more than $200 billion have been hit hard as the previous Congress-led government dragged its feet over environmental and land acquisition clearances.
The new government faces the challenge of boosting investment while its Central Bank Chief Rajan keeps borrowing costs high in a bid to stave off Asia’s second fastest inflation. A Bloomberg survey of 34 economists found all of them expecting him to keep the benchmark repo rate unchanged at 8 percent after a June 3 review.
Rajan raised borrowing costs three times since taking over as Central Bank Chief in September last year.
Restoring investor confidence, easing price pressures, and fiscal consolidation are among the government’s focus areas, Bloomberg quoted Finance Minister Arun Jaitley as saying. The government may find its job quite difficult in the backdrop of adverse global economic conditions that are telling on the country’s export growth. The sector accounts for nearly 25 percent of the domestic economy.
Equally worrisome are the prospects of below-average monsoon rains this summer, which could hit farm output and fuel inflation. The inflation-focused Central Bank would find it challenging to cut interest rates to support growth.
Persistently high inflation and interest rates have crimped consumer demand. Consumer goods output, a proxy for consumer demand, has grown just once in the past 11 months.
Modi won India’s first outright parliamentary majority since 1984 with a pledge to boost growth and create more jobs, raising hopes among investors for a turnaround led by spending on infrastructure.