The growth estimates for the country’s economy for the current financial year, as per the latest release of the Central Statistics Office, has reiterated the toning down of the Indian economic expansion. These advance estimates, based on the performance so far of key sectors, the study of the government expenditure and the anticipated levels of production in agriculture and industry, also help highlight the extent of the slowdown in the country’s economic growth momentum.
INDIA NATIONAL INCOME 2011
- The growth in GDP at factor cost at constant prices (2004-05) during 2011-12 is estimated to be 6.9%, as against the 8.4% growth in the previous year.
- The agriculture sector is expected to grow by 2.5% this year compared with the 7% growth last fiscal.
- The manufacturing sector too is likely to see a decline in growth rate to 3.9% during 2011-12 from the 7.6% growth attained in 2010-11.
- The service sector is the only sector that is expected to register stable/marginal higher growth in the current financial year.
- The growth in trade, hotels, transport and communication sectors during 2011-12 is estimated to be 11.2% compared with the 11.1% growth in 2010-11.
- Per capita income at constant prices (2004-05) is likely to grow at 5.6% during 2011-12 to Rs.38,005 and the same at current prices is estimated to grow by 14.3% to Rs. 60,972.
- Private consumption as shown by the rate of Private Final Consumption Expenditure (PFCE) at constant prices is likely to decline by 0.6% to 58.1 % of GDP at market prices in 2011-12.
- The rate of investment as seen in Gross Fixed Capital Formation (GFCF) at constant prices is estimated to decline to 31.9% of GDP at market prices in 2011-12 from 32.5% in 2010-11.
The “ less than market expectation” 6.9% rate of GDP growth for 2011-12 compares unsatisfactorily with the 8.4% growth in the previous year and the 9% original forecast for the year. This sharp decline in growth, a consequence of the series of monetary tightening efforts of the Reserve Bank of India that went on for more than two years to reign in stubbornly highly inflation (that averaged 9.3% in the first 9 months of the fiscal), as well as low demand conditions resulted in weaker growth in industrial output. The weakness in the global economy too has contributed to the slowdown in domestic economic growth through lower growth in exports. Going ahead too, the country’s economic expansion would likely be subdued.
Although the agri-sector growth estimates come in lower than expected at 2.5%, the high base effect cannot be ignored here. The sector grew by an impressive 7% in 2010-11, following the drought of 2009-10 that saw the Agri output decline by over 6%. This year too, the country has registered healthy growth in output. As per the latest 2nd advance estimates of the ministry of agriculture, the estimated production of foodgrains in 2011-12 would be at a record of 250.42 million tonnes, 5.42 million tonnes higher than the target and 5.64 million tonnes more than last year record production. Cotton, sugarcane, wheat and rice are estimated to register record output this year, while oilseeds, pulses and coarse cereals are likely to see some decline in output.
The higher output of the farm sector has been acting as a stabilizing factor for the nation’s economy – by way of stimulating demand for non-farm goods as well as providing supplies for manufactured farm products which in turn activate the industrial output.
The growth in the industrial sector is expected to be subdued this year with manufacturing growth at 3.9% as against 7.6% last year, construction at 4.8% compared with the 8% growth in 2010-11 and the growth in mining and quarrying is likely to be negative 2.2% as against the 5% growth in the previous year. The only noteworthy growth in Industry is from the electricity, gas and water supply segment which is estimated to grow by 8.3% this year, 5.3% more than that in the previous year. The growth in this segment (electricity, gas and water supply) along with the services sector has been acknowledged as one of the main contributors to the country’s GDP growth this year.
The high-interest rate regime that has been prevailing in the country coupled with policy inaction in the area of mining and subdued investments, has impacted this sector. Going into the future too, only in the scenario of affirmative policy action, improvements can be expected in this sector. As with regard to high-interest rates it is largely believed that the interest rates have peaked.
The services sector has been the chief driver of GDP growth this year. The sector has witnessed broad-based growth with the ‘trade, hotels, transport and communication’, ‘financing, insurance, real estate and business services’ and ‘community, social & personal services’ estimated to clock growth rates of 11.2%, 9.1% and 5.9% this year against growth rates of 11.1%, 10.4% and 4.5% respectively last fiscal. The influence of this sector on the country’s economy is likely to persist in the coming times too.
Expenditure and Investment
Private expenditure, measured as a percentage of market GDP, is expected to be lower than that in the previous year both at current and constant prices owing to the general weakness in India’s economic health. While private expenditure measured by Private Final Consumption Expenditure (PFCE) is likely to decline from 58.7% of GDP in 2010-11 to 58.1% in the current year at constant prices, the same at current prices may decline from 56.5% to 56.4% respectively in 2010-11 and 2011-12.
The rate of investment in the economy as seen from the Gross Fixed Capital Formation has witnessed a decline in the last two fiscals. This year too it is expected to decline to 31.9% of GDP at constant prices from 32.5% of GDP in 2010-11 and from 30.4% last year to 29.3% of GDP in 2011-12 at current prices. This drop-in investment is largely owing to the global economic conditions that have impacted sentiments and have prompted deferment of investment decisions.
Impact on Fiscal Deficit
It is now certain that the government would be unable to meet the fiscal deficit target set out in the FY12 budget of 4.6% of GDP. Although, the government had envisaged borrowing to the tune of Rs.4.17 trillion for the fiscal, owing to revenue and disinvestment shortfalls and increases in the expenditure the government announced additional borrowing to the tune of Rs.90,000 CRS, taking total borrowing for the year to Rs.5.07 trillion. Going by the advance estimates of GDP at market prices for 2011-12, the fiscal deficit for 2011-12 now works out to 5.68% of GDP.
CARE’S VIEW ON GDP GROWTH IN 2012-13
Based on the present conditions and growth levels, it is expected under conditions of stable inflation at 5%, the cautious fiscal deficit with some incentives for investment, lowering of interest rates by 100-150 bps during the year, GDP growth could gradually move towards 7.5% in FY13.