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India: GDP Falls to 5.3%

December 1st, 2012
in econ_news, syndication

Econintersect:  GDP growth for India has fallen to a level approximately half of that just 1 1/2 to 2 years ago.  The preliminary reading for the second fiscal quarter of 2013 (July India-flagSMALLto September 2012) is 5.3%.  There is worry that the final reading might be even lower.  Just a year ago many were estimating that India could remain at the 10% annual growth rate that was achieved in late 2010.

The slumping GDP result is troublesome especially in light of continued inflation.  The latest CPI for industrial workers for October, releasedyesterday (30 November 2012), was 9.6%.  This was an increase from 9.1% in September.

Follow up:

The persistent inflation reduces the room available for monetary easing to stimulate the economy for fear of fanning the unacceptably high CPI growth rate to an even higher level.

Kumal Kumar Kundu, senior economist for Roubini Global Economics, had the following to say in the Wall Street Journal:

Clearly social sector spending by the government, with an eye on the 2014 general election, continues unabated. This pushes up the growth rate, at the cost of a higher fiscal deficit as revenue collection remains weak. Data released Friday by the Controller General of Accounts showed the cumulative fiscal deficit for the seven months of this fiscal year (April-October) was 71.6% of the budget. Even more worryingly, the revenue deficit for this period has already reached 81.4% of the budget.

In essence, the government is continuing to stimulate the economy by going beyond its means. Given the failure of the 2G spectrum auction and anaemic disinvestment revenue generation so far, India will likely pay a price of such profligacy through a high fiscal deficit, low capital formation and mounting inflationary pressure.

Despite signs that the economy is slowing, the Reserve Bank of India is unlikely to be tempted to cut the policy rate this calendar year. Rather it will continue to keep an eye on the liquidity situation and opt for a combination of open market operations — buying government securities and thereby releasing liquidity in the market — and further cuts to the cash reserve ratio if necessary.

The first rate cut move will only materialise during the first quarter of 2013. For the full year, I expect GDP growth to be in the region of 5.6%-5.8%.

John Lounsbury

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