Indian economy grew by only 5.0% in FY 2012-13, its slowest pace in a decade, according to figures revealed by the Ministry of Statistics today. Low investor confidence, slumping investment, high inflation and weak export demand were blamed for the economy’s dismal performance. Gross Domestic Product (GDP) grew at 4.8 percent in the quarter ending March 31st. The manufacturing sector grew an annual 2.6 percent during the quarter while farm output rose just 1.4 percent. The economy in contrast had grown by 6.2 percent in FY 2011-12.The economy has clearly not been able to sustain the booming growth rates of the last decade which hovered around 10 percent.
Global ratings agency Standard and Poor’s warned earlier this month that India faces at least “a one-in-three” chance of losing its prized sovereign grade rating amid new threats to economic growth and reforms.
The Organisation for Economic Cooperation and Development (OECD) this week lowered its projection of India’s GDP to 5.3% in 2013, from 5.9% earlier, yet said India might be the third largest economy by now after US and China.
Despite government efforts to revive the slowing economy after a burst of pro-market reforms at the end of last year, most independent analysts see continuing slack in aggregate demand. The UPA government has been surrounded by corruption scandals during its second term in office which has had a detrimental effect on investor sentiments. Few of the reforms which government had initiated last year included opening up of retail and aviation sectors to foreign direct investment (FDI) and partial deregulation of fuel prices to ease the subsidy bill. But it has failed on various fronts such as on passing legislation to open up the insurance and pension sectors or a long-delayed law to simplify land acquisition.
On the other hand, the fiscal deficit figures for FY 2012-13 were impressive at 4.89% of GDP, owing to higher revenues. Lower levels of inflation which the economy is currently facing can be linked to the lower fiscal deficit. India’s wholesale inflation dropped last month to a surprise 41-month low of 4.89%. But the consumer price index is at 9.39%, led mainly by high food and beverage prices.
Government pressure has mounted on the RBI to ease borrowing costs to encourage investment. The RBI had raised interest rates aggressively in 2010 and 2011 to combat double-digit inflation. However, RBI governor Duvvuri Subbarao has said the bank has “limited space” to ease monetary policy further due to the risk of inflation flaring up again.The persistent decline in rupee is also a cause of concern. Depreciation leads to imports becoming costlier which is a worry for India as it meets most of its oil demand via imports. The depreciating rupee will add further pressure on the overall domestic inflation and since India is structurally an import intensive country, as reflected in the high and persistent current account deficits month after month, the domestic costs will rise on account of rupee depreciation.
The Sensex and Nifty came under tremendous selling pressure on Friday, while the rupee hit an 11-month low. Reserve Bank of India (RBI) governor D Subbarao on Thursday said inflation was still high and current account gap remained a concern for the Indian economy.
Mr Subbarao’s comments dented rate cut hopes. Traders, who had been certain the central bank would cut rates by another 0.25 per cent at its June 17 review, hit the panic button on their terminals.The Sensex traded 461 points or 2.3 per cent lower at 19,755, while the Nifty shed 141 points to 5,983 as of 3.10 p.m. The rupee extended losses to 56.73 against the dollar.
With depreciating rupee and mounting CA Deficits, the automatic stabilization through rise in inflation due to mounting import bills could lower the interest rates and boost investment. The rise in investment can help revive the economy and sustain higher growth rates in the long run. It however remains to be seen how the government plans to improve the investor confidence and speed up the pending policy reforms to remove investment bottlenecks.