Monday, September 3, 2012

Challenges for India’s policymakers on the rise as India records worst 1st quarter growth in a decade and key debt and deficit indicators rise

Robust growth by construction, real estate and financial business services, which together account for 27% of the GDP, along with a 2.9% growth in agriculture took India’s Q1 2012-13 growth to 5.5%, even as the manufacturing sector slowed to a near-zero (0.2%) growth. All three critical drivers of growth, namely, private consumption, investment and exports continued to slow. The decline in the growth of fixed investment to 0.7% in Q1 of 2012-13 as against 14.7% in Q1 of 2011-12 is the major source of concern, as it indicates further deceleration in growth going forward. While the high rate of growth (10.9%) of construction is on a low base (3.5% in Q1 last fiscal), the 'financing, insurance, real estate and business services' sectors together grew 10.8%, even on a high base of 9.4%. The 'trade, hotels, transport and communications' sectors witnessed just 4% growth, owing partly to a high base effect (13.8% in Q1 of the last fiscal). Overall, services output slowed sharply to 6.9% in Q1 from 7.9% in the previous quarter, reflecting the lagged adverse effects of the industrial slowdown on the services sector. A survey by the central bank has shown that estimated total fixed investment by large firms in new projects which were sanctioned financial assistance nearly halved during 2011-12 indicating further slowdown in economic activity and job creation.

Slowing growth is taking its toll on revenues while government was unable to rein in its expenditure: fiscal deficit during April-July reached Rs 2.64 billion or 51% of the budgeted estimate of Rs.5.1 billion, raising fears of the government breaching its fiscal deficit target of 5.1% of GDP for the current fiscal. Government's total receipts in the first four months of the fiscal was at Rs. 1.73 billion, just 17.7% of the budgeted amount, while its expenditure climbed to Rs. 4.37 billion, or 29.3% of the budgeted amount. With increasing recourse to debt flows and drawdown of reserves to finance the CAD, various external sector vulnerability indicators showed considerable deterioration during 2011-12. The central bank’s report on India’s external debt showed that reserve cover of imports, the ratio of short-term debt to total external debt, the ratio of foreign exchange reserves to total debt, and the debt service ratio deteriorated during the financial year. On the positive side the share of government (external) debt has gone down and the country remains in a comfortable position with regard to short term debt and the debt service ratio relative to other indebted countries.  

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