Q4FY13 GDP - NEITHER A SHOCKER NOR A SURPRISE

By Ruma Dubey

The Q4FY13 GDP at 4.8% was neither a big surprise nor a big shocker. It was very much on the expected lines.  Growth for FY13 came in at 5% v/s 6.2% in FY12, which is exactly what it should have been given the performance of the 4 quarters but it was a bit disturbing to know that this GDP of 5% is the lowest since 2002. Now that in many ways reflects the entire macro picture, putting into perspective the true state of the economy.

But we as humans tend to hope for the best always and these numbers somehow raise the hope that probably this was the bottom; things can only look up from here. The ride up, if and when it happens will be excruciating slow and gradual, literally like a snail climbing back from a well. Yet, the systemic issues remain – the GDP numbers clearly shows that creation of capital investments is simply not happening. No new investments are taking off. Some 441 large projects worth Rs.10 lakh crore are said to be stuck over various issues – environmental, land, rehabilitation, coal. This means that merely getting a nod for a project means nothing till it actually takes off.  

We are really at a very crucial juncture – infra build is imperative and unless it takes off now, by the time they do get going, their capacities would have simply become redundant. Also older projects are ready for a makeover or modernisation, when will that get addressed? Infra build is essential for the growth of the economy as it is what will kick start employment, raise demand and help the GDP.  

The Govt is currently working only with an eye on the polls. Govt spending has dropped significantly in sectors which require growth. But at the same time, it is putting money into more social schemes which will be inflationary in the longer term but in the short term, might help them win the elections. So the focus is more on the polls than growth. Yet, historically, it has been seen that 8-9 months before the polls, the Govt gets into an overdrive and aggressively pushes ahead with projects for completion. That might thus bring in some relief. But one should not place too high hopes on this changing the story drastically.

The only good news was that fiscal deficit for FY13 had come in slightly lower at 4.9%, much below the estimates of 5.2%. This was thanks to the cut in govt spending. But more worrying is the Current Account Deficit number and unless that comes down from the current high of 6.7% of GDP to around 5.5%, the rupee and the balance of payments could be in big trouble.

Everytime, the GPD or IIP number comes, the immediate question is whether RBI will reduce rates. One cannot help but wonder why the media thinks that RBI alone, with its rate cut can help spike up growth? That is not RBI’s job! And yesterday’s statements by the RBI Governor, clearly indicates that he is not going to reduce rates in a hurry based on just a month’s fall in WPI rate while CPI remained in rhe double digit. Rate cuts happening in June seems unlikely but over the next few days, the media frenzy will again build up and raise illogical hopes of a rate cut. Dr.Rao is now well know for not giving into tokenism to make the markets happy so a mere 25 bps cut, even if it happens, will not really help and a 50 bps rate cut? We are simply not yet ready for that.

Everything for now depends on the monsoon. Yes, despite such technological advancements and science making progress, we still need the Rain Gods! There is no invention yet made to make water. If there is a normal monsoon, we can be assured that the growth will pick up but if it takes a turn for the worst, then it could turn into a very ugly story.  So instead of tuning into the next GDP, IIP or inflation numbers, it is best to keep an eye on the sky and hope that rains do not play truant this year.

Next week, rains should hit Kerala and by 10^th June, it should come to Mumbai.  Let’s see ….