On the face of it, GDP growth in the first quarter of 2012-13, at 5.5 per cent, was a tad higher than the 5.3 per cent recorded in last quarter of 2011-12. However, these are year-on-year growth figures. Computing yearly growth with quarterly numbers is akin to setting the reference period for comparison four years back for annual data. Hence, an assessment of the present quarterly growth numbers is better made by comparing sequential data.
Sequentially, GDP growth was a negative 6.4 per cent in the first quarter. Not only has overall GDP fallen, the decline has been pervasive across sectors. Except for two sectors --- , electricity, gas and water supply and financing, insurance, real estate and business services --- all other sectors witnessed a dip in output.
GROWTH PATTERN
Community, social and personal services, followed by mining, agriculture and manufacturing, showed a major output decline. In terms of the popular three-sector classification, agriculture, industry and services sector witnessed negative growth of 11 per cent, 4.6 per cent and 6 per cent, respectively. This is in sharp contrast to the 2.9 per cent, 3.6 per cent and 6.9 per cent growth for these three sectors, when the data are compared on an annual basis.
Should the fall in GDP in the June quarter on a sequential basis suggest bottoming out of production activity, and should things be improving in the subsequent quarters?
If we consider the quarterly growth numbers on a sequential basis over the past several years, including the boom period, we find the decline in first quarter numbers is a recurring phenomenon. A look at the quarterly data over the past five years (sequentially computed) suggests that growth is negative in the first quarter, gradually improves in the second quarter and peaks in the third quarter before tapering off in the fourth.
Thus, the decline noticed in the June quarter may be more of a seasonal phenomenon, and does not clearly indicate the seriousness of economic problems facing the country. This is not to deny that the economy seems constrained by an inability to grow at the earlier levels.
Growth may decline either because of a paucity of productive capacity or inefficient use of available capacity. Though at an aggregate level, gross fixed capital formation has fallen only marginally from 33.9 per cent in Q1 of 2011-12 to 32.8 per cent in Q1 of 2012-13, efficiency in resource use captured through the ICOR (incremental capital output ratio) has deteriorated significantly. The decline in ICOR is now deeply embedded in the system, because over a medium-term horizon, the ICOR deteriorated from 4.2 in the Tenth Plan (2003-07) to 5.1 in the Eleventh Plan (2008-12). The decline in efficiency of the Indian economy is a major cause of concern. The rising ICOR is a reflection of policy stasis (read, inaction), a new jargon coined by the RBI researchers in its recently released annual report for 2011-12.
FOUR-PRONGED CRISIS
The Indian economy has been besieged by problems for quite a while. The problems are visible in all the four dimensions — real, financial, fiscal and external.
The RBI had frontloaded the rate reduction in April in the hope that the Government would do its bit in pushing pending reform measures and take some serious steps towards fiscal consolidation. The central bank’s decision to press the pause button on interest rates on July 31 drives home the point that the onus lies with the Government to revive momentum in the economy.
If the policy quagmire continues, the fiscal deficit target would be overshot again in 2012-13. That would further limit the scope for monetary action to revive the economy. The present economic malaise is primarily due to the lackadaisical approach of the Gvernment in resolving long-pending administrative and policy issues.
The economic scene has been further complicated by a deficient monsoon. Even as there are signs of a monsoon recovery, the deficient monsoon is likely to create problems on three fronts — inflation, growth and government finances in the first round, in addition to second-round impacts on industrial growth.
INFLATION THREAT
The think-tank at the Reserve Bank feels the growth impact will be less compared with that on inflation. The RBI feels institutionalisation of the social safety network through the MNREGA will act as an automatic stabiliser, and hence growth may not be affected. However, the impact on prices of food items will be more direct and acute.
This will not only add to the headline inflation numbers but will also keep inflationary expectations at higher levels, as perceptions about headline inflation are highly correlated with food price inflation. With inflation, which is already beyond the comfort levels of the RBI, likely to be under pressure, hopes of the RBI lowering rates in the near future have faded further.
Sustainable high growth needs sound polices and their implementation in the right spirit. While the Government remains committed to populist measures, the RBI is pursuing inflation control with a single-minded focus. This divergence of approaches is costing the economy dear. If India wants higher growth, its political masters must raise their standards of governance.
(The author is Associate Dean, Xavier Institute of Management, Bhubaneswar. The views are personal.)