Growing dismally

From the heady growth rates of 8 per cent and above,the economy seems to be adjusting to a new normal range of 5 to 6 per cent growth. The implications for per capita income,employment prospects and investment opportunities will be dismal as long as this new range persists. The 5.5 per cent growth rate of GDP for the April-June period also means that the assumption of the Prime Minister’s Economic Advisory Council of a 6.7 per cent growth rate for the whole year has become more shaky. The worrying sign is the persisting weakness in the growth of fixed investment that has come in at 0.7 per cent compared with 14.7 per cent a year ago. This is because the inventories of companies are still running high. As long as these do not melt,the chances of fresh investment are bleak.

Along with the GDP numbers,other data also released on Friday shows that this bear phase could continue longer. Core sector growth rate in construction and electricity,the two sectors that have held up the GDP numbers till June,has worsened in July. Data on government finance shows that New Delhi has already used up 50 per cent of its fiscal headroom within the first four months of the year. This means the curb on government expenditure that RBI has asked for is nowhere in sight. Even worse,the rise in expenditure is not in investment — non-plan expenditure accounts for a third of the total expenditure. Coupled with the GDP data,the Reserve Bank of India’s surmise could be that the economy will be no better off with any further cut in interest rates.

The only good news at this point is the slight improvement in private consumption expenditure. But the absolute numbers do not add up,which could mean this too might be revised downwards in November. Overall,there is only one way the economy will break out of the below 6 per cent range. The government must act decisively.