On 30th November 2011, India’s Ministry of Statistics announced a lower than expected GDP growth rate of 6.9% for Q2FY12 (July-Sept 2011). (India’s financial year ends on 31st March). This meant that for the H1FY12 (March-Sept 2011) period, India’s GDP grew at 7.3% in real terms and 16.6% in nominal terms.
However, on 10th Dec 2011, India’s Ministry of Commerce announced a major revision in its data for April to November 2011 period, by revising down exports from India by US$ 9 billion.
If we carry through this correction in the GDP figures, the revised GDP growth for India for April-Sept 2011 period works out to 5.7% per annum over the corresponding previous year. This GDP growth is more consistent with the evidence which can be inferred from physical indicators of economic activity.
Further, the fiscal deficit for the central government for H1FY12 is estimated at 6.3% of GDP, against the target for FY12 of 4.6%. In other words, if the government was to maintain its fiscal stance as spelled out in the budget at the start of year, the economy would not have received an extra fiscal boost of 1.7% annualized in H1FY12. This can be further interpreted as the autonomous growth rate of Indian economy for H1FY12 was a mere 4% (i.e. 5.7%-1.7%).
We believe that as a direct result of fiscal profligacy demonstrated by Indian government since Oct 2008, inflation in India has moved to a level significantly higher as compared to other peer economies. This high inflation, along with initial inability to perceive the root cause of inflation, has tied the hands of RBI in conducting monetary policy. This handicap faced by the RBI, coupled with the persistent current account deficit (which many rightly believe is another by-product of fiscal deficit), is putting significant pressure on the Indian currency. This pressure is not expected to ease in the near future.
The Indian Prime Minister is stating that India will soon revert to 9% growth rate trajectory. We sincerely hope that he is not planning to resort to another round of fiscal profligacy to achieve this short-term growth objective.
To increase the autonomous growth of India from the recently observed 4% to 9% will require a significant effort to built a credible program of economic reforms and infrastructure development, assisted in short-term by a weak rupee. However, whether this government has any political will to sustain reforms is a matter of debate, concern and indeed a great tragedy for the people of India.