V care Varsity

In sharply revising downwards its April growth forecast for the current year (2013-14) by more than one percentage point, the Economic Advisory Council (EAC) to the Prime Minister has not exactly sprung a surprise. According to its recently released flagship publication, Economic Outlook 2013-14, the economy will grow by 5.3 per cent, far below the 6.4 per cent projected earlier. The Reserve Bank of India, which was less ambitious to begin with, had revised its estimate to 5.5 from 5.7 per cent. Almost all private forecasters have been projecting even lower rates of growth ranging from 4 to 4.9 per cent. A sub-5 per cent annual growth trajectory seems well within the realm of probability. Official statistics confirm the downward drift. During the first quarter of this year the economy grew by just 4.4 per cent, even lower than the 4.8 per cent of the previous quarter. With the economy unlikely to do much better in the second quarter (July-September), the EAC as well as the more optimistic government spokespersons hope that the second half of the year will be much better and lift the overall rate of growth to something above 5 per cent.

Agriculture is the only sector that is expected to do well on the back of a good monsoon, with a projected increase of 4.8 per cent as against 1.9 per cent in 2012-13; industry is expected to grow by 2.7 per cent as against last year’s 2.1 per cent, and services by 6.6 per cent, down from 7.1 per cent last year. But the farm sector has only a small share in GDP. Even the relatively low expectation from industry might be misplaced. A critical component — manufacturing — has yet to show signs of revival. Between April and July, it actually declined by 0.2 per cent. Another component, mining, remains in the doldrums. On the positive side, the rupee depreciation has already boosted the performance of a wide range of export industries including textiles and leather. The merchandise trade deficit has been coming down in recent months, also due to lower imports of gold and capital goods. A healthy performance by the IT and IT-es industries could help in containing the current account deficit, which remains a prime concern. The EAC’s projection of a $70 billion deficit (3.8 per cent of GDP) in 2013-14 as against an estimated $88.2 billion (4.8 per cent) seems over-optimistic as of now. Net capital flows are expected to be lower this year and there could be a small drawdown of reserves. Containing the fiscal deficit is another big challenge. During the first four months of the year, it has already reached nearly 63 per cent of the budget. While the EAC has suggested a number of measures to deal with the “twin deficits,” its biggest contribution might well be the realistic GDP growth estimate.