Economy slips back to pre-reform period

The Indian economy would expand 4.9 per cent in the ongoing fiscal 2013-14, according to advance estimates released by CSO on February 7, 2014. The growth rate in GDP measured at factor cost indicates some improvement over 4.5 per cent during fiscal 2012-13, which is, however, a downwardly revised number as compared to 5 per cent assessed earlier. A sub 5 per cent expansion for two consecutive years, which has not happened over the past quarter century or so, points to the economy reverting to pre-reform era of suboptimal performance.

The subdued economy is because of uninspiring industrial sector and not the farm sector, a usual scapegoat for any slack. Agriculture, forestry and fishing speeded from 1.4 per cent to 4.6 per cent following good progress of southwest monsoon. Production of food grain is expected to grow 2.3 per cent as compared to decline of 0.8 per cent in the previous agriculture year. The production of cotton and sugarcane is expected to grow 6.7 per cent and 1.1 per cent as compared to decline of 2.8 per cent and 5.5 per cent, respectively, in the previous year. However, a broader industry comprising mining, manufacturing, electricity and construction, the sector that has benefited most from reforms, would likely crawl to only 0.7 per cent from an already miserable 1 per cent in 2012-13 and 7.7 per cent in 2010-11 and 2011-12.

In broader industry, manufacturing fared the worst, declining by a likely 0.2 per cent, against 1 per cent rise in 2012-13, 7.4 per cent in 2011-12, and 8.9 per cent in 2010-11. Most of the decline was caused by quickening rot in governance quality and worsening physical infrastructure deficit.

Even the resilient services sector seems to have settled down at around 6.5-7 per cent annual increase over 2011-12 to 2013-14, against 10 per cent average in earlier two years. In services, trade, hotels, transport and communication recorded the worst feat, with the pace going down from 5.1 per cent in 2012-13 to 3.5 per cent in 2013-14.

Exports have revived but imports have gone down due to economic slowdown. Private final consumption expenditure has slowed to 4.1 per cent (5 per cent) due to lower income growth. The government final consumption expenditure has slowed from 6.2 per cent to 5.5 per cent due to deficit considerations.

Project investment mauled
Policy apathy and flip-flops battered the new investment activity that can ensure sustained decent economic growth. Gross fixed assets formation (investment) would probably remain stagnant for the second straight year in 2013-14. Helped largely by public works etc., construction activity fared slightly better though the rate remained at a pitiable 1.7 per cent. The overall investment rate in the economy (the ratio of gross capital formation including valuables to GDPmp) would be 32.3 per cent, sliding from 34.7 per cent in fiscal 2012-13 and a recent high of 36.5 per cent in 2010-11.

The economy size i.e. GDP at market prices would increase by 12 per cent to around Rs.113 trillion. Taking the current exchange rate of around Rs.62 per USD, the economy size would be about $1.8 trillion.

Likely performance in H2
Juxtaposing advance annual estimates against H1 data already available, it would appear that CSO expects economy to fare better in H2, relative to H1, due to much better farm income on the back of excellent progress of southwest monsoon. However, project investment and manufacturing would rot further.