State of the Indian Economy and Growth Prospects for 2013-14 Shruti J. Pandey, R.

Krishnaswamy* Latest GDP Estimates The current slowdown has been across the board with no sector of the economy left unaffected. Such a consistent story is evident from a review of the estimates of gross domestic product(GDP) regularly released by the Central Statistics Office (CSO), the latest one being for Q1 of 2013-14 which has placed the real GDP growth year-on-year to be as low as 4.4%. The period was preceded by a growth of 5.0% during the full financial year 2012-13 and 6.2% during 2011-12; even these growth rates had been the lowest during the last ten years which are attributed to many structural constraints faced by the domestic economy, as also to weak external demand. An attempt is being made in this note to examine Indias current as well as prospective growth performance but against the backdrop of the performance during the past decade from 2004-05 onwards. The decades experience provides interesting lessons from public policy responses in the form of fiscal and monetary stimulus and unwinding of stimulus measures when the world economy has been faced with severe recessions twice over. The Indian domestic economy has also faced similar macro-economic policy dynamics. The consequential growth phases, the structural developments and policy responses during those phases have been reviewed in this note. A more difficult exercise attempted in the note concerns the projections made for the year 2013-14 for which there are divergent views amongst scholars as well as national and international institutions. In this respect, we have stuck our neck out to say that there are some bright spots which, as explained in the relevant section of the note, provide for better growth outlook during the year. Signs of improvement in export demand, bountiful rains and prospects of a bumper agricultural crop, series of policy initiatives on the fiscal front and on the fast-tracking of sizeable numbers of stalled projects on the part of the government, substantial positive signals from the Reserve Bank of India (RBI) to bring down the cost of funds to banks and to promote expansion in bank credit despite a small hike in policy rate, and all of these providing better sentiments for the private corporate sector for its output and investment activities which have otherwise reached rock bottom levels.
*

Shruti J. Pandey, and R. Krishnaswamy are with the EPW Research Foundation (epwrf.mumbai@gmail.com), Mumbai. The authors thank Dr. S.L. Shetty for the help rendered in the preparation of this note.

GDP Growth during 2004-05 to 2012-13 The most disappointing aspect of the growth trends during the past decade has been the hastening of the long-term structural changes experienced in the Indian economy in the form of the commodity-producing sectors losing ground and the growth emanating from the services sector. The share of agriculture in total GDP has precipitately dipped to as low a figure as 13.7%, and more distressingly, the share of industry has got stuck at around 27% with no sign of any improvement. Correspondingly, the services sector share has risen from 53.0% in 2004-05 to 59.6% in 2012-13. Though any inter-country comparison is not the objective of this paper, it is insightful mentioning, even if in passing, that Chinas industrial share in that countrys GDP has been continuously rising and has reached 47% - about 20 percentage points more than Indias. It must be admitted that Indias overall growth performance during the decade has not been as depressing as experienced now. The first three years 2005-06 to 2007-08 experienced very high growth of over 9% in each year or an average of 9.5%. This was followed by a year of world recession in 2008-09 which spilled over into the domestic economy and the GDP growth fell to 6.7%. The problems of the domestic economy were further compounded by the drought-like situation obtaining in agriculture during the year. The growth in agricultural and allied activities fell rather sharply from 5.8% in 2007-08 to a miniscule 0.1% in 2008-09 due to a fall in the production of non-food crops and partly on account of the high base effect. In industry, the dip in output was due to the slowdown in manufacturing which suffered from the combined effects of a fall in exports and declines in consumption as well as investment demand. However, the services sector growth was nearly a double-digit level at 9.9% in 2008-09 mainly supported by the increase in community, social and personal services following an expansionary fiscal policy reflected in the demand side of GDP in government final consumption expenditure (GFCE). In order to protect the economy from global uncertainty, the next two years saw massive doses of monetary and fiscal stimulus provided by the RBI and the government reductions in interest rates and tax rates and liberal doses of government borrowings leading to crossing the fiscal deficit limits set in the Fiscal Responsibility and Budget Management Act (FRBM), which prevented the economy from plunging into recession. As a result, in fact GDP growth averaged 9% in the two years 2009-10 and 2010-11. However, the continuation of the expansionary fiscal policy followed by a severe drought in 2008-09 as well as in 2009-10, as also the upsurge in world commodity prices, led
2

to serious inflationary pressures in the Indian economy. Whereupon, the RBI began to pursue a tight monetary policy; it raised the repo rate 13 times between March 2010 and October 2011. The entire set of investment sentiments amongst domestic as well foreign investors suffered a serious setback. Foreign capital flows as well as current flows declined rather significantly, the current account deficit has shot up, foreign exchange reserves began to deplete, and the rupee suffered a severe depreciation (Table 1).

Table 1: Estimates of GDP by Economic Activity (At 2004-05 Prices) 2004-05 2005-06 2006-07 2007-08 2008-09 1 Agriculture, Forestry & Fishing 565426 594487 (5.1) 910413 (9.7) 86141 (1.3) Manufacturing 453225 499020 (10.1) 67123 (7.1) 258129 (12.8) 3 Services 1576255 174817 3 (10.9) 815407 (12.0) 492340 (12.6) 440426 (7.1) GDP at Factor Cost 2971464 325307 3 (9.5) 619190 (4.2) 102120 4 (12.2) 92578 (7.5) 570458 (14.3) 73362 (9.3) 284806 (10.3) 192397 0 (10.1) 910084 (11.6) 561063 (14.0) 452823 (2.8) 356436 4 (9.6) 655080 (5.8) 1119995 (9.7) 95997 (3.7) 629073 (10.3) 79430 (8.3) 315495 (10.8) 2121561 (10.3) 1009520 (10.9) 628124 (12.0) 483917 (6.9) 3896636 (9.3) 655689 (0.1) 1169736 (4.4) 98055 (2.1) 656302 (4.3) 83050 (4.6) 332329 (5.3) 2333251 (10.0) 1085125 (7.5) 703629 (12.0) 544497 (12.5) 4158676 (6.7)

Industry

829783

Mining & Quarrying

85028

Rs Crore 2009201010@@ 11@ 66098 713477 7 (0.8) (7.9) 12769 1393879 19 (9.2) (9.2) 10383 108938 0 (5.9) (4.9) 73043 5 (11.3) 88218 (6.2) 35443 6 (6.7) 25781 65 (10.5) 11978 91 (10.4) 77190 5 (9.7) 60836 9 (11.7) 45160 71 (8.6) 801476 (9.7) 92773 (5.2) 390692 (10.2) 2829650 (9.8) 1345660 (12.3) 849632 (10.1) 634358 (4.3) 4937006 (9.3)

201112# 739495 (3.6) 144249 8 (3.5) 108249 -(0.6) 823023 (2.7) 98814 (6.5) 412412 (5.6) 306158 9 (8.2) 144031 2 (7.0) 948808 (11.7) 672469 (6.0) 524358 2 (6.2)

2012-13 (PE) 753610 (1.9) 1472462 (2.1) 107619 -(0.6) 831648 (1.0) 102918 (4.2) 430277 (4.3) 3279363 (7.1) 1532034 (6.4) 1030684 (8.6) 716645 (6.6) 5505435 (5.0)

Electricity, Gas & Water Supply Construction

62675 228855

Trade, Hotels, Transport and Communication Financing, Insurance, Real Estate & Business Services Community, Social & Personal Services

727720

437174

411361

@@ -Third Revised Estimates @ - Second Revised Estimates # - First Revised Estimates Figures in bracket are y-o-y percentage growth Source: CSO, EPWRF Online Database, National Accounts Statistics Module

PE: Provisional Estimates

In the meantime, some discouraging structural features have emerged in the evolution of the economic performance. In fact, this began immediately after the high growth phase which ended in 2008-09 following the world recession. The most conspicuous feature in this has been the persistent decline in the domestic saving rate which has touched the lowest level of 30.8% of GDP in 2011-12 from the peak of 36.8% attained in 2007-08. Both public sector
3

and corporate sector savings have suffered, more so the former. In household savings, financial savings have been severely been depleted and this has been brought by the sizeable increases in gold imports. These factors, in turn, have contributed to the relative stagnation in the domestic investment. The worst to suffer in this respect is the corporate sector fixed investment, which fell from a peak of 15% of GDP in 2007-08 to 11.6% in 2011-12; it appears to have faced a further setback in 2012-13. More concretely, the rising incidence of interest cost has hit the private corporate sector, and within it, the manufacturing companies, and more significantly, the smaller companies. In the case of all sectors and all-size companies, interest cost as percentage of sales has jumped three-fold from 1.2% in the first half of 2008-09 to 3.7% in the first half of 2012-13. Similar increase has taken place amongst the manufacturing firms. Size- wise, the small companies always have high interest cost; in this phase their cost has doubled from 4.3% to 9.2% of sales. Thus, there has been an all-round increase in interest cost which appears to be the only factor responsible for drastically reducing the net margin of companies. In the case of the corporate sector as a whole, the profit margin has declined from 9.2% of sales in H1 of 2008-09 to 6.4% in H1 of 2012-13. In the case of manufacturing firms, the fall has been equally steep. Size-wise, the small companies have suffered the hardest, with sizeable negative profit margin during the past two years. It is, therefore, not surprising that because of the paucity of investible resources with the private corporate sector, the sector has experienced the sharpest fall in its fixed capital formation rate. Thus, in the current malaise reflected in the low GDP growth which began in 201112, the poor investment demand has been a major contributory factor, particularly from the corporate sector. The consumption demand, especially from the households, stood its ground until the latest year 2012-13. As shown in Table 2, all important indicators of demand have suffered a serious setback during 2012-13, which is reflected in persistent declines in quarterly growth of the year.

Table 2: Estimates of Expenditure on GDP (at 2004-05 Prices) 2004-05 Total Consumption Expenditure PFCE GFCE Gross Capital Formation GFCF change in stock Valuables Exports Less Imports Discrepancies GDP at a market prices 2272026 1917508 354518 1052232 931028 80150 41054 569051 625945 -25155 3242209 2005-06 2469316 (8.7) 2083309 (8.6) 386007 (8.9) 1223717 (16.3) 1081792 (16.2) 101511 (26.7) 40414 -(1.6) 717424 (26.1) 829926 (32.6) -37288 (48.2) 3543244 (9.3) 2006-07 2660471 (7.7) 2259892 (8.5) 400579 (3.8) 1410754 (15.3) 1231265 (13.8) 133556 (31.6) 45933 (13.7) 863459 (20.4) 1008198 (21.5) -54998 (47.5) 3871489 (9.3) 2007-08 2910316 (9.4) 2471397 (9.4) 438919 (9.6) 1653438 (17.2) 1430764 (16.2) 175411 (31.3) 47263 (2.9) 914628 (5.9) 1110963 (10.2) -116472 (111.8) 4250947 (9.8) 2008-09 3134069 (7.7) 2649610 (7.2) 484459 (10.4) 1626220 -(1.6) 1480943 (3.5) 85290 -(51.4) 59987 (26.9) 1048140 (14.6) 1363302 (22.7) -28778 -(75.3) 4416350 (3.9)

Rs Crore 2009-10 3397005 (8.4) 2845303 (7.4) 551702 (13.9) 1832051 (12.7) 1594475 (7.7) 143052 (67.7) 94524 (57.6) 999030 -(4.7) 1334180 -(2.1) -103059 (258.1) 4790847 (8.5) 2010-11 3673232 (8.1) 3088880 (8.6) 584352 (5.9) 2128284 (16.2) 1817584 (14.0) 185509 (29.7) 125191 (32.4) 1195764 (19.7) 1545163 (15.8) -156009 (51.4) 5296108 (10.5) 2011-12 3969459 (8.1) 3334900 (8.0) 634559 (8.6) 2159418 (1.5) 1897309 (4.4) 128655 -(30.6) 133454 (6.6) 1379225 (15.3) 1877197 (21.5) 475 -(100.3) 5631379 (6.3) 2012-13 4125959 (3.9) 3466723 (4.0) 659236 (3.9) 2270487 (5.1) 1929988 (1.7) 223032 (73.4) 117467 -(12.0) 1420094 (3.0) 2004073 (6.8) 1197 (152.0) 5813664 (3.2)

Figures in bracket are y-o-y percentage growth Source: CSO, EPWRF Online Database, National Accounts Statistics Module

Trend in Quarterly GDP The Indian economy after Q1 2008-09 had exhibited a V-shaped recovery within a span of a few months of the stimulus measures, both fiscal and monetary, working through the system. However, growth started decelerating since Q1 2011-12 onwards. It is observed that the first quarter GDP growth has always been low; even so, it is noteworthy that Q1 2013-14 growth has been the lowest since 2005-06 (Chart 1). And, when compared with all four quarter of each fiscal, Q1 GDP growth is the lowest in the last 17 quarters.

Chart 1: Quarterly Real GDP at Factor Cost

12.0 10.0 8.0 6.0 4.0 2.0 % Growth

2010-11

2005-06

2006-07

2007-08

2008-09

2009-10

2011-12

2012-13

Q1

Q2

Q3

Q4

Sector-wise, growth in agriculture & allied activities is estimated to have slipped to 2.7% in Q1 2013-14 from 2.9% in Q1 2012-13.
5

2013-14

The industrial sector has shown a fractional growth of 0.2% in Q1 2013-14 as compared to 1.8% growth in Q1 2012-13, with weak performances in all its sub-sectors. The service sector growth has eased to 6.6% in Q1 2013-14 from 7.7% in Q1 2012-13, reflecting a decline in the pace of growth of trade, hotels, transport and communication to 3.9% from 6.1%. Additionally, the growth of financing, insurance, real estate & business services is estimated to be moderate at 8.9% in Q1 2013-14 as compared to 9.3% in Q1 2012-13. However, the growth of community, social & personal services has improved to 9.4% from 8.9%, partly reflecting the sharp growth of government spending in this quarter. Looking at expenditure components, growth in private final consumption expenditure saw a reduction of 1.6% in the first quarter of 2013-14 against 4.3% in the corresponding quarter a year ago and was the lowest since Q1 2005-06, whereas, the growth in GFCE accelerated to 3.7% as against 0.7%. On investment front, gross fixed capital formation growth, after recording positive growth in the last three quarters of 2012-13, saw a negative growth of 1.2% in Q1 2013-14. GDP Projections for 2013-14 In making an assessment of the Indian economy prospective growth performance, this note adopts an iterative process combining the quantitative results of a short-term forecasting model exercise and inputs from qualitative judgements on the evolving complex economic situation.1 A word on the methodology we employ. For our exercise, we do not venture to adopt any of the sophisticated methods such as the time series models or econometric models using functional relationships linking aggregate GDP with some explanatory variables. We have found such methods less dependable in short-term forecasting. Instead, we have depended on a methodology using possible explanatory variables for a disaggregated set of sectoral output and thus arrive at GDP at sectoral levels and the sum total of GDP at the national level. The projections, as presented in Table 3, reveal a real GDP growth of 5.7% in 201314. This shows a prospective position which appears encouraging. This compares with the Governments expectation of 5% to 5.5% growth, which has been accepted by the RBI also. As against these, the International Monetary Fund (IMF) has just come out with a projection of 4.25%, which is low and appears unrealistic. We are confident that our quantitative results have some basis in the current perspectives of macro-economic developments. First, it is now
1

A paper in three parts published on the EPWRFs website (www.epwrf.in) as part of the weekly theme papers for the week ended March 21, and March 28, 2009 entitled A Short-term Forecasting Model for Indias GDP: Supply-Side Disaggregated Sectoral Forecasting I, II and III

evident that Indias export demand has started looking up. Exports during April-September 2013 have shown a positive growth of 5.14% at US$ 152,105 million as against a negative growth of 6.2% in the corresponding period a year ago. The growth in September 2013 has been the highest in the first six months of the current financial year. There has also been some revival of portfolio flows and flows based on NRI deposits because the RBI has provided swap arrangements for them. The rupees exchange rate situation also seems to have stabilised. Secondly, RBI has reduced the effective interest rates for the bankers which may eventually result in some moderation in interest costs to the borrowers. In any case, banks have reduced interest rates on retail loans. RBIs latest data also suggest a significant improvement in credit pick-up. Thirdly, the agricultural sector has enjoyed timely and sufficient rainfall almost throughout the country. The sector is projected to grow at 4.0% in 2013-14, that is, much higher than the last year growth of 1.9%. The first advance estimates for the kharif 2013-14 season, place foodgrains output at 129.32 million tonnes, higher than the last years fourth estimate of 128.20 mt. It could have been still better but for the excess rainfall and damage to standing crops in some sub-divisional areas. Finally, the growth in private sector sales, profitability, and investment have bottomed out in 2012-13 and now signs of looking up are seen. Revival of stalled projects, improved demand from the rural areas and the construction industry and improvement in exports are expected to give an impetus to corporate output and investment activities.
Table 3: GDP Projection for 2013-14 (At 2004-05 Prices) 2010-11@ % y-o-y 2011-12# growth 713477 (7.9) 739495 Agriculture, Forestry & Fishing 1393879 (9.2) 1442498 Industry 108938 (4.9) 108249 Mining & Quarrying 801476 (9.7) 823023 Manufacturing 92773 (5.2) 98814 Electricity, Gas & Water Supply 390692 (10.2) 412412 Construction 2829650 (9.8) 3061589 Services 1345660 (12.3) 1440312 Trade, Hotels, Transport & Communication 849632 (10.1) 948808 Financing, Insurance, Real Estate & Business Services 634358 (4.3) 672469 Community, Social & Personal Services 4937006 (9.3) 5243582 GDP at Factor Cost *: Projection @: Second Revised Estimates #: First Revised Estimates PE: Provisional Estimates Source: CSO, EPWRF Online Database, National Accounts Statistics Module (Rs Crore) % y-o-y 2012-13 growth (PE) (3.6) (3.5) -(0.6) (2.7) (6.5) (5.6) (8.2) (7.0) (11.7) (6.0) (6.2) 753610 1472462 107619 831648 102918 430277 3279363 1532034 1030684 716645 5505435 % y-oy growth (1.9) (2.1) -(0.6) (1.0) (4.2) (4.3) (7.1) (6.4) (8.6) (6.6) (5.0) 201314* 783754 1505543 108157 841628 108270 447488 3528010 1639276 1125507 763227 5817307 % y-o-y growth (4.0) (2.2) (0.5) (1.2) (5.2) (4.5) (7.6) (7.0) (9.2) (6.5) (5.7)

In Conclusion Overall, the review brings out how the Indian economy has experienced an all-round slowdown. But, the latest indications suggest distinct signs of improvement. This augurs well

for achieving the 12th Five-Year Plan target of 8.0% average growth, though the first two years of the plan 2012-13 and 2013-14 have lagged behind the plan targets of 5.8% and 7.3%, respectively.

References Economic Advisory Council to the Prime Minister (2013): Economic Outlook 2013-14, September Government of India: Economic Survey, Various Issues Planning Commission 2013: Twelfth Five Year Plan 2012-17, Volume I: Faster, More Inclusive and Sustainable Growth.