India’s growth story: Can it regain momentum?

India’s growth story: Can it regain momentum? Ajeet Kumar/Reema Sharma

India started the fiscal year 2012-13 on a sluggish note combined with poor economic growth the world over. To top it all, allegations of policy paralysis by the Opposition and India Inc also brought down the confidence of the Indian economy.

However, led by bold economic reforms undertaken by the government, coupled with Quantative Easing (QE3) in the US and settlement of impending uncertainty over eurozone area, India finally saw some light at the end of the tunnel. The passing of FDI in multi-brand retail by the Parliament was nothing less than icing on the cake.

The consensus on US Fiscal Cliff by the Barack Obama government also helped in perking up the Indian stock market, consequently boosting investment sentiment in the country. Thus, the hope of growth is gradually translating into reality – this has been substantiated by the economic indicators in the last couple of months. Manufacturing growth, industrial growth, rise in foreign institutional investors, stock market testing 20,000 level (highest in two years) bear testimony to the fact that Indian growth story is not just a farce.

Nonetheless, with Budget 2013-14 around the corner, India faces major challenges. Some of them are - India’s own economic reforms awaiting to be put in place, implementation of structural reforms like GST, DTC and passing of banking and insurance bill.

Overseas challenges in terms of eurozone crisis and uncertainty over tax and spending decisions in the US might also impede the speed of India’s growth momentum.

Here is an overview of the Indian economy:

Growth

The GDP growth slowed from 5.5 percent in the first quarter ended June 30 of 2012-13 to 5.3 percent in the second quarter ended September 30. The gross domestic product (GDP) had expanded by 6.7 percent in the same period of last fiscal. The decline in the GDP growth rate became broad based, with consumption demand also slowing alongside stalling investment and declining exports. On the supply side, there are indications of weakening resilience of services to sluggish global growth.

Fiscal Health

India's current account deficit (CAD): Amid moderating pace of exports, the country's current account deficit (CAD) rose to a record high of 5.4 percent of GDP or USD 22.3 billion in the July-September quarter.

The CAD, which represents the difference between exports and imports after considering cash remittances and payment, was USD 18.9 billion in the same period of a year ago and USD 16.4 billion in the first quarter (April-June).

As per experts, in a slowing economy, the sustainable level of CAD is 2.5 percent of GDP.

The CAD had risen to 4.2 percent of GDP in the 2011-12 fiscal on account of high gold import and increasing prices of crude oil in international markets. India imports 75 per cent of its crude oil requirement. The foreign exchange reserves increased by USD 5.1 billion during the quarter, reflecting depreciation of the US dollar against major international currencies.

Fiscal deficit : Government’s fiscal deficit touched 78.8 percent of the budget estimates (BE) in the nine months to December 2012. The is a slight improvement, since the percentage in the first eight months was 80.4.

In absolute terms, the fiscal deficit or gap between expenditure and revenue receipts stood at Rs 4,04,699 crore at the end of December 2012, according to the data released by Controller General of Accounts (CGA) . Government has estimated the fiscal deficit for 2012-13 at Rs 5,13,590 crore. The fiscal deficit in the first nine months of current financial year, however, is lower than that of 92.3 percent of the Budget estimates (BE) in the same period of previous fiscal.

The improvement on the fiscal deficit front in comparison to the same period a year ago is attributed to government’s measures of rationalisation of expenditure including 10 percent mandatory cut on non-plan expenditure.

Besides, steps have been taken to cut the subsidy outgo on petroleum products. The expenditure during the period was 66.5 percent of BE as against 71.3 percent in April-December of the last fiscal.

For the current year, the deficit is estimated at 5.3 percent, up from earlier estimate of 5.1 percent.

Foreign Direct Investment (FDI)

During January - November 2012, India has received FDI worth USD 21.68 billion, a decline of 33 percent over the same period of previous year. India's foreign direct investment (FDI) inflows declined to a nearly two-year low of USD 1.05 billion in November 2012, mainly due to global economic uncertainties. In November 2011, the country had attracted FDI worth USD 2.53 billion. For the April-November period 2012-13, the inflows have declined by about 31 per cent to USD 15.84 billion, from USD 22.

Foreign Institutional Investment (FIIs)

FIIs, the key driver of Indian markets, poured in USD 24.4 billion (around Rs 1.28 lakh crore) into Indian equities in 2012 —— second highest net inflows since 1993 when India opened up its door for foreign investors. In 2010, overseas investors had made net investments of about USD 29 billion (about Rs 1.33 lakh crore). FIIs, a major participant in Indian stock market, had pulled out a net USD 358 million (Rs 2,714 crore) in 2011.

Trade

Exports contracted in December for the eighth month in succession, reflecting depressed external demand conditions and structural bottlenecks. On the other hand, imports rose on the back of higher oil and gold imports, consequently widening the merchandise trade deficit in the third quarter compared to its level a year ago.

India's exports contracted by 1.9 percent in December to USD 24.88 billion, down for the eighth month in a row due to demand slowdown in the US and European markets. Exports had stood at USD 25.3 billion in December 2011. Imports grew however by 6.26 percent to USD 42.5 billion in December, leaving a trade deficit of USD 17.6 billion.

During the April-December period of 2012-13 fiscal, the country's overseas shipments have shrunk by 5.5 percent to USD 214.1 billion. Imports during the period have dipped by 0.71 percent to USD 361.2 billion. There is an arrest in the fall of exports as all the sectors including engineering have slightly improved. During the first nine months of this financial year, the trade deficit stands at USD 147.2 billion.

Inflation

Inflation based on wholesale prices declined to a three-year low of 7.18 percent in December, but it has failed to provide relief to consumers as retail prices rose to cross the double-digit mark in the same month.

However, retail inflation rose for the third successive month in December at 10.56 percent, driven by higher prices of vegetables, edible oil, pulses and cereals. Inflation stood at 7.24 percent in November while in December 2011 it was 7.74 percent.

In the fuel and power category, inflation was 9.38 percent against 10.02 percent in November. Inflation in manufactured products was at 5.04 percent in December against 5.41 percent in the previous month.

Food inflation, as a category, stood at 11.16 percent in December against 8.50 percent in the previous month. Food articles have 14.3 percent share in the WPI basket.

Agriculture

Output of major crops, both food and non-food, is expected to decline by about 2.3 percent in 2012-13 as sowing has remained sluggish, economic think tank, Centre for Monitoring Indian Economy said in its monthly report.

The total food grain production is projected to fall by two percent to 251.6 million tonne in 2012-13. Non-food crop production is expected to dip by a steeper 2.7 percent in 2012-13, it said.

Among the non-food crops, the sharpest fall is expected in cotton production. "We expect sluggish sowing to limit cotton production to 32.2 million bales in 2012-13," the report said.

Infrastructure and Industry

Dashing hopes of a rebound, the industrial output contracted to a four-month low of 0.1 percent in November due to poor performance of manufacturing and mining sectors and decline in production of capital goods.

Factory output growth was 1 percent in April-November period this fiscal, down from 3.8 percent in the same period in 2011-12, according to official data,

The manufacturing sector, which constitutes over 75 percent of the index, grew by meagre 0.3 percent in November in 2012, as against a 6.6 percent in 2011.

The output of the key sector remained low at one percent in April-November last year as against 4.2 percent growth in the same period in 2011.

Infrastructure

The key infrastructure sectors' expansion slowed to 3.3 percent in April-December 2012 as against 4.8 percent in the same period previous year. The eight key infrastructure sectors include crude oil, petroleum refinery products, coal, electricity, cement and finished steel and have a weight of 37.9 percent in the overall Index of Industrial Production (IIP).

Tax collection

Led by healthy growth in personal income tax collection, the gross direct tax collection in the nine months till December of the current fiscal increased by 8.01 percent to Rs 4.28 lakh crore.

Gross direct tax collections during April-December of the financial year 2012-13 stood at Rs 4,28,278 crore as against Rs 3,96,530 crore in the same period last year.

The personal income tax collection grew at a healthy rate of 14.57 percent as the gross collection from the segment increased to Rs 1,44,376 crore. During April-December 2011-12, the mop was Rs 1,26,012 crore. Gross collection of corporate taxes showed an increase of 4.94 percent at Rs 2,83,170 crore as against Rs 2,69,850 crore in the same period last year.

India's indirect tax collection during April-November of the financial year 2012-13 grew by 17 percent to Rs.2.92 lakh crore, compared to the annual growth target of 27 percent.

For the comparable period last year, collection of indirect taxes, comprising excise, customs and services tax, stood at Rs.2.50 lakh crore.

(Data source: RBI, Finance Ministry, Agency)