NEW DELHI: The Indian economy grew at 7.1% in the July-September quarter. The growth is lower than expected as compared to the previous quarter.
India is still the fastest growing economy in the world, ahead of China. However, the GDP figures for the latest quarter are lower than expected. Forecasts predicted a 7.2-7.6% growth rate for the July-September quarter. The first quarter growth rate of 8.2% was a two year high.
The latest figures come ahead of the RBI monetary review this month and could impact the stance of the central bank in its decision on rates. Some economists expect the RBI to keep things unchanged. Here’s what a couple of economists had to say regarding what they expect the RBI to do given the economic data - A Prasanna, Chief Economist, ICICI Securities - “In terms of policy action, status quo on rates and durable liquidity provision by the central bank will continue”; Anubhuti Sahay, Head of Economic Research, Standard Chartered Bank – “We expect the MPC (monetary policy committee) to retain its calibrated stance in the December policy meeting amidst uncertainties around crude oil prices and global growth”.
While the economy is growing at a steady pace, faster than that of China’s, the weakened trend from last quarter’s high could be a cause for concern. The unemployment rate is a two year high of 6.9% in October according to a Centre for Monitoring India Economy (CMIE) report.
The period of July-September was relatively turbulent for the economy. A weakening rupee, rising domestic fuel prices and a banking sector that wasn’t at its healthiest and still isn’t to some extent. This contributed to reduced investment and consumption. The Hindu editorial points out the dangers of a growing fiscal deficit – “the fiscal deficit crossed the budget estimate for the full year in just the first seven months, raising the chances that the Centre would miss its target of limiting the deficit to 3.3% of GDP”.
A recently released report by SBI stated that the government could cut its spending by Rs. 70,000 crore to meet its fiscal deficit target. There has been a fall in rural incomes as food prices have gone down. There is however a steady momentum with regard to investment demand. The government would do well to remove any hurdles to investment; the recent ranking of India in the ease of doing business report is promising.
The government will need to keep up the spending on capital and revenue accounts in order to keep the economy sustainable with the aggregate fiscal deficit targets in mind. Private investors are playing the waiting game by holding off until there is a clearer picture of the election outcome. Investors are unsure of what form a new government will come into power. The total investment increase is mainly due to the government; hence it’s too soon to point to a recovery in the private sector. While investment grew along with government expenditure, it was neutralized by the net exports.
Going forward, given the rupee levels and oil prices currently, there could be stronger growth. Madan Sabnavis, Chief Economist, CARE Ratings, in a column writes on what future growth is likely to be – “While a higher growth in Q2 would have provided a cushion to reach growth of 7.5 percent for the full year, it would now be a case of similar growth rate in the region of 7.4-7.5 percent to be registered henceforth in the next two quarters consistently…”.
The one sector to concentrate on going forward is the farming sector. Prices are lower than that of the MSP promised by the government as a result of very poor procurement. Loan waivers are only a temporary relief. The recent farmers march proved that the government’s policies aren’t helping too much.