India: The Present Economic Outlook

Postat den 7th June, 2013, 12:53 av Saumitra Chaudhuri, Delhi

In the fiscal year ended March 2013, the Indian economy turned out its weakest economic growth in a long while. The provisional estimates released at the end of May 2013, reported that the economy grew by 5.0 per cent, terribly weak compared to even the crisis year 2008-09, when India managed to close the year with 6.7 per cent growth. An economy of more than 1.2 billion people, the majority of who are poor by any global benchmark and where tens of millions of youngsters are coming out of school and college each year in search for jobs and livelihoods, depressed growth is very bad news. The average annual rate of growth for the eight year period from 2003/04 to 2010/11 was 8.6 per cent. The average over the 20-year period 1992/93 to 2010/11 was 7.0 per cent.

In the two years immediately following the crisis year, namely in 2009/10 and 2010/11, the Indian economy grew by 8.6 and 9.3 per cent respectively. So why did growth slump to 6.2 per cent in 2011/12 and to 5.0 per cent in 2012/13? And what is the near-term outlook and prognosis for growth? Is a revival possible in 2013/14? These are questions that hang like a heavy cloud over both policy makers and economic analysts. For the magnitude of the slump in the second half of 2011/12 to 5.5 per cent was surprising, as was the persistence of slow growth in 2012/13.

Broadly the answer to the question of why the slump happened appears to lie in three separate elements. (1) The first is that the vigour of the recovery from the crisis year was underestimated in the preliminary estimates of economic growth. This led to some delay in adjusting the fiscal and monetary stimulus that had been rolled out to counteract the effects of the crisis in 2008/2009, which in turn allowed inflation to be pushed up to unacceptably high levels. This in conjunction with rising world commodity prices undermined profitability. The impact was compounded by a significant depreciation of the national currency. Companies saw their operating margins decline, and corporate profit growth was weak. (2) Plans for equity infusion had been deferred by many companies as the crisis unfolded. They had kept capital flowing into projects by taking on more leverage than originally envisaged. The shortage of equity has however persisted into present times. This combined with declining profitability has stretched balance sheets painfully. Hardly a condition that is favourable to business expansion and investment. (3) Beginning earlier, but becoming more painful since 2010, projects started to face numerous problems in securing clearances from administrative departments to carry forward their projects. These difficulties were complicated in the context of judicial decisions and guidance in some cases. All of this also had adverse impact on the quality of banking assets, as banks play a big role in funding projects in India.

Aside from soaring inflation, the deterioration of macro-economic conditions stemming from deterioration in fiscal conditions and the external payments situation, together with contentious domestic political climate and high level of rhetoric negatively impacted economic conditions. Compounding this was the malaise in the global economy. The generally depressed state of global business sentiment was reflected in weak business confidence within India.

In many ways this was a perfect storm. So many unrelated problems came together in a short span of a few years. The hubris that unfortunately arose from the successful negotiation of the global economic crisis certainly prepared the ground for a high-impact letdown.

Where do we stand today? The fiscal trajectory has been corrected. Politically difficult decisions in rationalization of fuel prices, re-prioritization of expenditures and some other steps to boost revenue, has seen the fiscal deficit undergo strong correction and in the current year 2013/14 will stick to target. Long-standing decision on permitting foreign direct investment into certain areas and other reforms did not come cheap. An important partner in the ruling coalition left the government in September 2012, and another went in early 2013. However, the government has persisted in the right direction and overall macroeconomic policy has undergone the necessary stabilization.

Important re-jigging of the way clearances are given to projects has been undertaken and a higher powered committee of the Cabinet has facilitated the clearance of a large number of large investment projects. The government is energetically pursuing every opportunity to push for the execution of investment and asset creation in the public sector and to encourage private business to expand and invest. Over time, possibly in the second half of 2013/14, these measures should result in renewed investment activity.

Notwithstanding the sharp decline in growth, investment and savings rates remains favourable. Gross domestic capital formation in 2011/12 and 2012/13 were at 35.5 per cent of GDP in both years. This was lower than what it had been in 2007/08 (38.0 per cent) and in 2010/11 (37.0 per cent), but are still reasonably high. On the basis of historical relationships in India between investment and growth, this level is capable of generating 7 to 8 per cent rates of growth. The proportion of GDP going to create fixed assets (fixed investment rate) was about 30 per cent in both 2011/12 and 2012/13. The domestic savings rate for 2011/12 was nearly 31 per cent and probably close to that in 2012/13. In short, the domestic investment and savings rate are still at levels that can produce much stronger growth than has been evident in both of the two previous fiscal years.

That it has not, is in part, on account of the delays that has inflicted projects in India on account of clearances, fuel availability and other delays. For example, there is at the moment, more than 10,000 megawatts of thermal power plant capacity that is wholly or largely idle on account of non-availability of natural gas and coal. Likewise there are many projects that have got delayed in their path to completion, even as billions of dollars of capital has been invested in them. It is the belief of government that actively pursuing reform in policy and administration and facilitating the completion of such projects, the invested capital will be able to generate considerable incremental current output, that is, economic growth. It is not as if there is no market in India for incremental supply. Indeed the converse is true. The shortage of infrastructure services – electricity, roads and the like – seriously constrain output in India.

The positive developments that have materialized in India over the past year are: (1) Stabilization of a range of macro policies; (2) Restoration of the trajectory towards fiscal consolidation; (3) A decline of wholesale price inflation from double digit levels to about 5 per cent, which is within our comfort zone. Manufacturing output remains depressed as also measures of business confidence. However, there is a strong possibility that hard numbers will begin to show improvements in coming months and that there will be some degree of recovery in the second half of the year, which in turn should lay the foundation for a stronger and more broad-based economic recovery in 2014.
June 4, 2013