Advance official estimates of national income for 2012-13 see the GDP growing at 5%. This is the gloomiest projection of India’s current economic activity by any agency so far. Coming as it does from the Central Statistical Office (CSO), whose data informs every other estimate, the implications are grave.
The finance ministry in its mid-year review pegged 2012-13 GDP growth at 5.7-5.9%. The Reserve Bank of India (RBI) put it at 5.5% in its latest review of credit policy.
The International Monetary Fund has just revised its number down to 5.4%. The CSO’s advance estimates are a shocker, they imply GDP will grow at 4.6% in the second half of the fiscal year after having grown 5.4% in the first half. Going by this, the economy has not bottomed out yet despite fiscal correction and monetary easing.
The policy implications would be significant if the CSO scenario were to play out. The government will have to push the growth pedal that much harder.
Expectations of a growth-inducing budget had already built around finance minister P Chidambaram’s stated commitment to reversing the fiscal and trade deficits.
This data can only strengthen those expectations but they must be tempered by the political limits to reducing subsidies in an election-eve budget.
The RBI has recently refocused its priority towards growth amid signs of a loss of inflation momentum. This may have to be recalibrated if the economy is growing appreciably slower. Beyond the macroeconomic management, reforms will acquire a fresh urgency.
Although the government has moved ahead since September, the pace is still too slow for international observers.
The IMF reckons India’s potential to grow may have slipped by a couple of percentage points and pulling back would require some hard decisions on reforms, particularly on deregulating the financial sector.
Investors, too, are waiting for reforms to show up in the growth-inflation dynamic. Credit rating agencies had thawed to India upon sighting green shoots of recovery.
If that turns out to be a false promise, foreign capital will remain elusive despite the government’s efforts to make the tax administration less daunting. With the trade and fiscal gaps yawning, India can least afford a ratings downgrade that will push up the cost of capital.
There could be a positive upside, however, through the low base effect because economic activity had fallen precipitously in the second half of 2011-12.
The CSO’s advance estimates anyway have a pronounced bias favouring the experience of the first six months of a fiscal year.