As is well known, India ’s
national income (Gross Domestic Product or GDP) growth has slowed down. After
cruising well till 2007-08, the yearly growth rate fell to 6.7 per cent in
2008-09 due to the global financial crisis but accelerated again close to 9 per
cent in the next two years before starting to decline again. The growth rate has
declined sharply to 5.0 per cent in 2012-13 from 9.3 per cent in 2010-11. If
you observe the quarterly graph, from 9.9 per cent in the 4th
quarter of 2010-11, the growth rate has plunged to 4.4 per cent in the 1st
quarter of 2013-14, for which latest figures are available.
Reasons for the Sharp
Slowdown in GDP Growth:
There are plenty of reasons for
the plunging growth rate, but the main reasons are:
1. Runaway Fiscal Deficit and
Inflation: Since 2008-09, the fiscal deficit has shot up due to massive
increase in subsidies—mainly fuel, food and fertilizers. Inflation, primarily
stoked by uncontrollable fiscal deficit and supply chain bottlenecks, is eating
away the purchasing power, especially of the poor. The central/state governments
have not been able to unblock the supply chain problems bedeviling the nation
for several years. While exaggerating the fiscal deficit, the new
Food Security Bill (FSB) is an area of concern due to the poor track record
of the PDS and connected problems.
2. Lack of Economic Reforms and
Decisive Leadership: The Congress (I)-led UPA government has failed to
initiate any economic reforms. Although it has raised diesel and petrol prices
slightly in the last one year, it is not enough. Foreign direct investment
(FDI) norms have been liberalized in some sectors—like, multi-brand retail, civil
aviation, broadcasting sector, telecom and defence. But we’re yet to see any meaningful increase
in FDI, which may take some more time to fructify.
3. Debacle in Manufacturing
Sector: The growth in the manufacturing sector has come to a halt
aggravated by infrastructure bottlenecks, lack of business confidence and poor
investment climate. The government has failed to expedite environmental/land
clearances for projects in power, road, port, steel, etc. There are no labour
reforms for several decades leading to worker-employer schism. A number of
graduates remain unemployed. Bank credit to the infrastructure sector has dried
up due to rising bad loans.
4. Untamed Current Account Deficit
(CAD): India ’s
exports have slowed down due to tepid global growth (especially in the US , China
and eurozone) and India ’s
uncompetitive manufacturing products. The CAD has been widening due to India ’s overdependence
on imports—crude oil, gold, edible oils, fertilizers and capital goods. Inability
of public-sector Coal India
to mine coal has increased coal imports. Ban on iron ore mining led to higher
imports. The possibility of the US Fed tapering its bond buying programme has
caused funds outflow from emerging markets back to the developed ones,
resulting in massive depreciation of the currencies of India , Brazil ,
Turkey , and South Africa .
5. Bungled Investment Climate:
Rocked by corruption scandals in 2G telecom licences, misallocation of coal
blocks, retrospective tax amendments (e.g., Vodafone and Nokia) and GAAR
proposals; foreign and domestic investors have turned away from committing any
new investments. The mismanagement of the
Indian rupee, in the last six months, by the RBI and the central government;
perceptions of capital controls; gold control measures; and increase in the short
term interest rates too have vitiated the investment climate. Basically, India has lost
the confidence of global/Indian investors.
6. Election Hangover: Some
doubts have been expressed about the government’s ability to control the twin
deficits—fiscal deficit and CAD—in the pre-election year. Investors and voters
are looking forward to the 2014 general elections. There is some uncertainty as
to which coalition will come to power and what would be the policy action from
the new government. Indians are looking toward a sagacious and action-oriented
leadership.
What of the Future?
The momentum in growth rate has been
stunted and it’s very difficult to bring India on the growth trajectory
again. India
is yet to effectively tackle the problem of twin deficits. And there is this
threat of downgrade of India ’s
sovereign rating. Much depends on the policy and implementation front. There
are some global headwinds also—in the form of internal strife in Syria spreading to the entire Middle
East , rising crude oil and gold prices and the outflows from
emerging markets caused by US Fed tapering.
However, there is some silver
lining. The Indian monsoon has been good and widespread and it is likely to
push up the rural economy and bring food prices down. RBI has committed to
issuing new bank licences by January 2014. The Parliament has passed the
pension bill though in a diluted form. The direct benefits transfer (DBT) being
implemented through the unique identity ‘Aadhar’ may reduce subsidies by
effectively targeting the needy people. Falling rupee too may help the domestic
industry and push up exports. Latest reports indicate that the US may postpone its proposed attack on Syria .
Overall, it is better for
investors to remain cautious, watch out for the fast-changing developments and
not to be carried away by the noise of gloom, doom and boom.
Notes:
GAAR – general anti-avoidance rules, PDS – public distribution system, RBI –
Reserve Bank of India
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Disclaimer:
The author is an investment analyst, equity investor and freelance writer. This
write-up is for information purposes only and should not be taken as investment
advice. Investors are advised to consult their financial advisor before taking
any investment decisions. He blogs at:
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