The 5 per cent official GDP growth estimate for 2012-13 is a shocker for more reasons than one. For, the Reserve Bank of India, only on January 29, had projected growth for this fiscal at 5.5 per cent while unveiling its latest monetary policy review. Moreover, two days later, the Government brought down its GDP growth estimate for 2011-12 to 6.2 per cent, from the previous 6.5 per cent figure. This downward revision was seen to impart a favourable ‘base effect’, translating into higher growth for the current fiscal. But instead, the first advance estimates released by the Central Statistics Office on Thursday puts growth even lower at 5 per cent — the lowest since the 4 per cent of 2002-03 and a far cry from the average 8.5 per cent recorded during the eight years from 2003-04 to 2010-11.

But it is not the growth slowdown per se that is the real worry. A hallmark of the India Growth Story of the past decade was that it was essentially investment-led: The average annual growth in gross fixed capital formation (GFCF) during 2003-04 to 2010-11, at 13.2 per cent, even exceeded the corresponding overall GDP growth. In other words, while the Indian economy was growing at a rapid pace, it was also accumulating capital or adding to productive capacity, at an even faster rate. Since then, it has been just the opposite, with the growth in GFCF — 4.4 per cent in 2011-12 and an estimated 2.5 per cent for this fiscal — falling below general GDP growth. An economy needs investments not only to boost productivity that comes from building new roads, power plants or industrial estates, but also to generate employment and incomes. Without the latter, it is not possible to even sustain consumption beyond a point. The fact that private final consumption expenditure growth is pegged at a mere 4.1 per cent this fiscal, as against 8 per cent in 2011-12, shows how the drying up of investments is now beginning to impact consumption as well. Indeed, it would be naïve to expect Indians to continue to spend merrily when companies aren’t really hiring and even existing jobs are under threat.

If the ongoing India Slowdown Story has largely to do with lacklustre investment activity on the ground, the responsibility for fixing it lies primarily with the Government. It can do so first by streamlining procedures for land acquisition or environmental and other statutory clearances. That single measure would help revive the ‘animal spirits’ of entrepreneurs, who are currently afraid of taking up any large project entailing risks other than the purely business or commercial. Secondly, the Government should set its own fiscal house in order, which will release resources for deployment in railway or irrigation projects rather than untargeted subsidies and other unproductive current expenditures. Only investment can bring back growth again.

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