The economy is slowing down alarmingly. Gross domestic product (GDP) in April-June 2011 grew by 7.7%, which although considerably lower than the 8.5% in the first quarter of 2010-11, kept India trundling along on a decent growth trajectory as far as the rest of the world was concerned. But this dipped to 6.9% in July-September 2011 from 7.6% a year ago and further to 6.1% in the October-December quarter, down from 8.3%. Obviously Indians are buying more of everything from soap to software, but quite a few sectors are feeling the pinch of rising interest rates. Thus manufacturing, which soaks up a lot of debt, is sharply down to 0.4% growth from the 7.8% in the third quarter of 2010-11. Again capital-intensive mining has actually shrunk by 3.1% after output declined by 2.9% in the second quarter.
Much of the loss of momentum is deliberate, induced by a tightening of credit. The Reserve Bank of India is still waiting to unwind its money stance. Governor Duvvuri Subbarao is hesitant to pull out all the stops after raising interest rates by 3.75 percentage points since March 2010. Inflation could yet get out of hand, the central banker figures, if global oil prices do not soften; if food prices refuse to subside because of a weak supply of proteins; if suppressed energy prices at home are allowed to rise; and most damningly, if the fiscal deficit balloons. Mr Subbarao has, with a candour unusual in central bankers, called for restraint in government spending. Key deficit indicators are up from the year-ago period even after taking out the windfall of spectrum sale receipts. Beyond the budgeted estimate of Rs 417,000 crore, the government in two tranches announced extra borrowings of Rs 93,000 crore.
The government is committed to bringing down the fiscal deficit by half a percentage point successively from 5.1% in 2010-11 to 3.5% in 2013-14. These yardsticks are lower than what the country's financial ombudsman, the 13th Finance Commission, has suggested, and would result in a fiscal deficit of 3% by 2013-14. The government's self-imposed target, in itself, looks elusive; the actual fiscal deficit in April-January 2011 was 105% of the budgeted 4.6%. Subsidies on food, fuel and fertilisers, budgeted at 1.5% of the GDP in the current financial year, are on current indications likely to overshoot the target by a percentage point of GDP. Besides, a 2 percentage point decline in GDP growth will exert considerable pressure on the deficit. The government needs to convince itself and its populist allies that demands for preserving existing subsidies as well as announcing new ones like the right to food are not sustainable in this fiscal climate.