Opinion Spend,but not too much
GDP numbers reveal that growth could be lower next year.
The Indian stock markets have now gone down by 12 per cent since the start of the year. Partly,investors are concerned that raging inflation will hurt growth. But it is also because the government is seen to be doing precious little to keep growth momentum intact.
While the government estimates Indias GDP will grow by 8.6 per cent over the current financial year,implying a deceleration in the second half of the year,it could come in lower. The bigger concern now is that inflation,together with the continued lack of government initiative,could dampen growth in 2011-12 already disadvantaged by a high base effect,especially where agriculture is concerned. Not that theres likely to be any serious damage; but a growth rate of closer to 8 per cent rather than 9 per cent would be disappointing,not to mention the fact that it would generate fewer employment opportunities.
High inflation is already eating into disposable incomes. With prices of commodities soaring globally and the Indian economy running at near full capacity thanks to buoyant demand,it is unlikely to subside in a hurry. The Reserve Bank of India has been forced to up its inflation forecast for March 2011 to 7 per cent from 5.5 per cent. The chances are that inflation will not taper off meaningfully,hovering at around 6.5 per cent in 2011-12.
And this projection could go completely awry should oil prices go up further,and the government decide to push up prices of auto fuels at the pump. That would have a cascading effect on the prices of almost all goods.
India Inc is already feeling the pinch. A glance at the corporate results for the three months to December 2010 shows that,for a universe of 1,615 companies (excluding banks and financials),net profits are higher by just 12 per cent year-on-year. Firms in sectors such as cement and fast-moving consumer goods have seen their margins eroded; and several of Indias bigger companies have had to report a fall in profits during the quarter simply because they havent been able to pass on the higher cost of inputs to consumers. Indeed,despite it being a fairly inflationary environment,top-line growth for the sample has come in at a just-about-satisfactory 22 per cent year-on-year.
Whats certain now is that the central bank will need to keep money dear and raise interest rates by at least 75 basis points during 2011,having already upped policy rates by 175 basis points since March last year. Although investment and consumption are not too sensitive to higher interest rates,the risk this time round is that rates have already run up rather sharply even before corporates have been able to kick off investments and,moreover,while global recovery has been delayed. And gross fixed capital formation has moved up from 7.3 per cent in 2009-10 to 8.4 per cent in 2010-11,but because of a high 15 per cent increase in the first half of the year,implying a sharp slowdown in the second half. Project delays are clearly reflected in the estimate for industrial growth 8.1 per cent year-on-year,compared with double-digit numbers for the first six months of 2010-11.
In all this the government,bogged down by scams and pressure from opposition parties,has not been able to focus on business and so has been unable to spend its surplus of close to Rs 1 lakh crore. The five key state elections coming up could be a crucial factor in how much the government will choose to spend next year,especially since the Congress fared poorly in the recent state elections in Bihar. What is important is that public spending be directed at creating supply rather than boosting demand; in the past,the focus appears to have been aimed at supporting consumption.
How much it wants to spend will determine how much the government needs to borrow. Should it decide to borrow as much as it did in 2010-11 a gross amount of over Rs 4 lakh crore it could end up crowding out borrowings for the private sector at a time when the central bank wants to keep money supply in check.
Much like choosing between a rock and a hard place,too much spending could turn out to be inflationary,while not spending enough might hurt growth and,in turn,revenues. The government has seen something of a windfall in its revenue this year,thanks to spectrum auctioning; it will have to do without this next year.
Clearly,Indias macroeconomic environment has deteriorated,and although there are bright spots strong exports,robust rural incomes and a booming services sector the government needs to make sure the headwinds go away.
The writer is Resident Editor,Mumbai,The Financial Express shobhana.subramanian@expressindia.com
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