Feb 16, 2013, 06.11 PM IST
Finance ministry today said CSO's economic growth projection of 5 per cent for the current fiscal is below expectations and the government will continue efforts to revive the economy.
Former RBI Governor Bimal Jalan has questioned India's economic slowdown, asking whether it's a cyclical phenomenon, or becoming more of a structural problem
Bimal Jalan, Former Governor, RBI said "There are always ups and downs in eco; issue is whether the bottlenecks are structural or cyclical. At the moment we are in transition. Real issue is political shape of India has changed dramatically. It's fascist politics, not coalition politics per se and that's why we have to worry."
TCA Anant, chief statistician, India and Sajjid Chinoy of JP Morgan share their view on the topic.
Below is the edited transcript of the interview.
Q: Five percent has come as a huge disappointment because the consensus on the street was at least 5.5 percent?
Anant: Our computation is based on the set of indicators which are available to us at the time of making these calculations, i.e Demenber data.
Most figures came in post second quarter estimate, which indicates that key areas showed further weakness compared to the second quarter. Continued weakness was seen in the industrial sector though it was better than second quarter estimate. There was continued weakness in construction due to weak credit off-take and weakness was also seen in the agricultural sector.
These are the reason for lower numbers that what we calculated as the half year estimate of 5.5 percent. Since the third quarter did not show any significant improvement and some key areas showed slower growth, the numbers came in at 5 percent GDP growth. The final year’s picture will largely depend on the measures, balance figures and what happens in the last quarter of the year as well.
Q: The finance ministry and the finance minister believe that we are likely to see a pick up and the fact that your data doesn’t actually pick up on the turnaround that may have taken place since November last year?
Anant: We still have a few days more to go before we have all the figures but our Q3 calculations are implicit in this number.
At the end of the year, the government has been taking a number of steps. All of those will start showing up. Our calculation is based on the data as it comes in and we are backward looking to a certain extent. So, what will happen by year end will have to be read along with policy statements and government actions which can have an influence on the overall number at the end of the year.
Q: You said it is implicit what the Q3 GDP number will look like. It is very clear it will be sub 5 percent?
Anant: I would respect the finance ministry's observations on that because they are better judge of the impact policies are having on the ground. I am simply quoting the numbers based on the figures which were available to us up to the point of typically end of December when we make these calculations.
Q: You were closest to what the CSO has put as the advance estimates. You had estimated 5.2 percent. So, given that, what would you peg Q3 gross domestic product (GDP) growth? Most people seem to now expect 4.8 percent.
Chinoy: That is where we have been for a while. We are actually at 4.9 percent. That’s the quarter where the confluence of forces sort of comes together. It was the quarter in which exports really got hammered. It was the quarter in which the full impact of the sub-par monsoon on agricultural production manifests itself. Retail inflation was also high. So, consumption should take a hit and that is the debate here.
To be fair our numbers are close by. It is an imperfect science, but the turning point perhaps happened sometime towards the end of the third and fourth quarter because some leading indicators suggest that exports will pick up in the first quarter. There has been some IP momentum over the last couple of months.
That needs to be offset by the fact that the government in trying to meet its fiscal deficit target, has really slammed on the brakes in terms of government spending. So, that should drag activity down in the first quarter of 2013. However, one can argue that there is a little turning point which may have not been picked up.
Last year's first estimate was 6.9 percent. The final number was 6.5 percent and the revised estimates were 6.2 percent because we had the opposite problem. The economy was slowing at that point and so, any straight line projection would cause one to underestimate the final number. We may have the opposite problem this year.
Whether the final number is 5 or 5.3 percent that, is at some level missing the forest for the trees. This would be the lowest growth in 10 years and we need to focus on why the number is so low.
Q: Agriculture growth figures was much along the expected lines but the big disappoint came on the services front it slowed down to about 6.6 percent versus 8.2 percent. Have we in a sense over estimated the resilience of the services sector and of the consumption story?
Anant: Low service sector growth can be attributed to slow growth in financial and business services on account of low credit off take. Growth was again poor in freight transport segment including construction. Growth in communication sector has also slowed down
Q: Let me ask you about the two economic events that we are now going to have to contend with. One is the Budget and the next Reserve Bank of India (RBI) policy. We heard from the governor today saying he will have to look at these numbers and see how accommodates them in the next policy. What do you anticipate, do you believe that we are going to see a more aggressive monetary loosening policy now from the Reserve Bank?
Chinoy: The RBI is in a funny dilemma because if you just narrowly look at the growth inflation dynamics, that would argue for more aggressive easing. Growth will be perhaps less in what the RBI itself projected, inflation pressures are coming off and we should see a sub 7 percent number next week. So, that by itself would argue for more rate cuts but the RBI cannot forget macro economic stability. One cannot just ignore the current account deficit.
The Q3 current account deficit which comes out March 31, is likely to be perilously close to 7 percent of GDP, which by any yardstick is twice what’s deemed sustainable for India. In the past we know that that can put enormous pressure on the currency if there is any slow down in capital inflow. So, the RBI will be very mindful that there is a significant risk and those concerns on the fiscal deficit but the current account will basically constrain the amount to which the RBI will be able to cut rates even if the traditional growth inflation dynamics argue for more easing.
Q: What about the finance ministry and the Budget? We have seen the Finance Minister on these road shows talking about boosting the investment climate. He has committed to being able to deliver on the 5.3 percent and the 4.8 percent fiscal deficit number which means there is going to be a substantial drastic cut in government expenditure. Do you then see the Finance Minister moving ahead, doing things like hiking the excise and the service tax rates for instance?
Chinoy: Credibility is going to be very important. So, if we are going to target a 4.8 percent number, we can’t rely only on tax administration. It will have to be concrete measures, either to broaden the base or raise rates in some sectors and that is just a bitter pill that we have to swallow.
However, I would argue that perhaps even more important than the fiscal consolidation is boosting investment. If one looks at the slowdown over the last three years, fixed investment is projected to grow at 2.5 percent this year on the back of 4 percent last year.
This variable was growing at 16 percent for five successive years before the Lehman crisis. So, fiscal consolidation is clearly important for sentiment, but ultimately we have to de-bottleneck supply issues on the ground. Whether it is land environmental clearances, forest clearances, coal availability or raw materials, it is only when those things are de-bottlenecked that investment gets a boost.
Only then can growth go back anywhere close to the 7 percent level. So, that has to be the number one policy priority in my view. It is more important than the RBIs actions and even more I would argue than the Budget in the long run.
Q: So, where does this leave the GDP target then for FY14. We can quibble 5.3, 5.5 or 5 percent, but what about FY14?
Chinoy: We are working with a modest acceleration of about 5.8 percent, but it is really very much contingent on policy. If we can get the Cabinet Committee on Investments (CCI) to actually provide some traction to investments on the ground and let’s hope the global economy is a happier place because exports have slowed very materially. If both of those things can happen, then six percent growth thereabouts is potentially achievable. Otherwise, we are unfortunately constraint to this new equilibrium of 5-5.5 percent growth if nothing else changes.
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