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A sharp deceleration in the services sector, the engine of India’s growth story for the better part of the last decade, could well be the primary factor behind the current slide, with the economygrowing at 4.7% in 2013-14, the second successive year of sub-5% growth.
The services sector (including construction) grew at 5.8%, only slightly higher than last year’s 5.6%, but sharply lower than the 10-year average of 9% growth.
All the major components of the services economy — hotels, communication, financing, construction and public spending — have recorded growth rates below the decadal average during the last two years.
Between 2004-05 and 2009-10, the services sector, which accounts for more than two-third of the Indian economy, grew at average of more than 10%.
This pulled the broader economy’s growth to more than 8% of above for all but 2008-09 — the year when a financial crisis roiled the world economy.
The last two years — 2012-13 and 2013-14 — have been particularly worrisome for the services sector with growth rates plunging to decadal-lows.
This year, for instance, the construction sector, the lifeblood of critical intermediate industries such as cement and steel and the income source for millions of daily wage earners, has inched 1.6% during the year marginally higher than last year’s 1.1% crawl.
Cutback in government expenditure in a bid to rein in the fiscal deficit has translated into lower growth in ‘community, social and personal services’ in 2014-15 at 5.6%.
The fiscal deficit — shorthand for the amount of money the government borrows to fund its current expenses — in 2013-14 stood at 4.5% of GDP, lower than 4.6% projected in the revised estimate, mainly on account of curbs on government expenditure.
The fiscal deficit, the gap between government’s expenditure and revenue, in actual terms was `5.08 lakh crore as against `5.24 lakh crore projected in the revised estimate.
“The fiscal deficit is 4.5% of GDP. Revenue deficit is 3.2% of GDP. Effective revenue deficit is 2% of GDP,” the Controller General of Accounts (CGA) said in the provisional accounts for 2013-2014.
The government had chalked out a fiscal consolidation roadmap under which the fiscal deficit needs to be brought down 3% of GDP by 2016-17.
“This got reflected more in the fourth quarter growth of 3.3% as the government reduced its expenditure to meet the fiscal deficit target for the year,” Madan Sabnavis, chief economist, Care Ratings, said.
There are a few silver linings though.
Financial, insurance, real estate and business services contributed more than half of the overall GDP growth in during the year although, in terms of size, it is only 20% of the economy.
“It grew on the back of a rise in business services exports and aided by a pick-up in bank deposit. Improving global prospects could continue to favour this sector in 2014-15,” Crisil, a credit rating and research firm, said.