No economic recovery in sight for now

THERE are by now a fairly large number of estimates for GDP growth in 2013- 14.

The Economic Survey gave a range of between 6.1- 6.7 per cent with the budget probably using 6.5 per cent. The Prime Minister's Economic Council has lowered its estimates to the still improbable 6.4 per cent and the RBI has come out with its own lower forecast of 5.7 per cent. This is the same as that of the IMF. The ADB has estimated GDP growth in 2013- 14 at 6 per cent and domestic think tanks and industry associations have come up with a range of estimates between 6.0 and 6.4 per cent.

All these estimates, therefore, imply the beginning of a recovery, mild as it may be, and a bottoming out of the economy, which as we know hit a 10- year low of 5 per cent GDP growth rate in 2012- 13. Given the performance in the first two years, the Planning Commission would do well to come up with a new set of numbers so that investment decisions are made on more reliable data and on realistic grounds.

Growth estimates Most estimates agree on agriculture growth being around 3 per cent, rising from the present year’s low of 1.75 per cent. Industrial sector growth is generally pegged at 4.5 per cent in 2013- 14, which again is higher than the very anaemic 3 per cent achieved in the last fiscal. Given their share in the GDP of about 12 and 28 per cent respectively, growth in these two sectors would yield a GDP growth of 1.62 per cent. Thus, as always, the major contribution to GDP growth is assumed to come from the Services sector (including construction) which has a whopping share of 60 per cent in the GDP. The general assumption seems to be that its growth rate will rise to above 7 per cent in 2013- 14 with some estimates putting it as high as 7.7 per cent as compared to 6.6 per cent in 2012- 13. Thus, a recovery is premised on a better performance of the services sector.

Negative indicators The news on the services sector’s prospects for 2013- 14 is unfortunately not good. The latest HSBC PMI for the services sector shows it to be declining to an 18 month low of 50.4 from 51.3 in October 2012. This does not indicate a better performance in 2013- 14 as compared to the previous year. Also it should be noted that a PMI below 50 indicates an actual contraction in the sector. So according to this indicator the services sector may just achieve a positive growth rate and nowhere near 7 per cent as assumed by the forecasters. This is corroborated by several other indicators and anecdotal evidence.

Growth in tourist arrivals, which declined to 2.9 per cent in 2012- 13 from 6.7 per cent in 2011- 12, is from all accounts set to weaken further and there are news of widespread vacancies in hotels and poor bookings for the coming winter season.

Automobile sales (not car production) declined to 2.6 per cent in 2012- 13 from as high as 11 per cent in 2011- 12. These also show no signs at all of picking up with the demand in the first two months of the current fiscal remaining very weak. Domestic and international cargo movement had increased by 24 per cent in 2010- 11, then contracted by 5 per cent in 2011- 12 and again by negative 3 per cent in 2012- 13.

This is also not likely to increase much as world trade growth remains weak and India's own foreign trade is unlikely to regain its buoyancy of past years.

The two traditional drivers of services sector growth have been the telecom and financial sub- sectors. The telecom sector, which had seen growth rates of above 25 per cent year on year, seems to have run out of steam with significant contributions from the policy confusion to this slowdown.

Financial sector growth is hugely dependent on growth of major projects that need bank financing and on trade financing as well. According to data published by the RBI, the number of institutionally assisted projects came down from 543 in 2010- 11 to 499 in 2011- 12 and to a miserable low of 277 in the last fiscal year.

The total cost (proxy for credit requirement) of these projects declined to a mere Rs 911 billion in 2012- 13 from a high of Rs 3104 billion in 2010- 11. This huge fall is unlikely to be made up in the present year because from all accounts, there are no major projects being announced in the manufacturing or the infrastructure sector.

Lastly, a major sub- sector is community services along with other services offered by the public sector. These are unlikely to show any growth because of the pressure to reduce public expenditure and bring the fiscal deficit under control.

In the construction sector, there are hardly any signs of fresh buoyancy. Rentals in metro cities are beginning to soften. Tier one and tier two cities are seeing some growth but it is much weaker as growth of commercial properties (read malls!) is reportedly weakening all over the country.

Illustration: ARYA PRAHARAJ

‘Slowfation’ impact This detailed examination of the services sector prospects has been necessary to nail down the facile assumption made by a majority of forecasters that services sector growth, the mainstay of our economic growth, will pick up in the current year. On the basis of above, admittedly non- rigorous examination, I beg to differ. In my view, we will be lucky if the services sector growth remains at the same level ( 6.6 per cent) as last year and it may well decline.

If services sector growth (we are still not talking about a contraction or decline) is confined to 5 per cent in 2013- 14, overall GDP growth will be only 4.6 per cent. Even if the services sector grows by the same rate as it did in 2012- 13 ( a low probability), it will yield an overall GDP growth of 5.5 per cent. Thus, my estimates for economic growth in 2013- 14 range between 4.6 and 5.5 per cent. And this does not indicate any recovery or bottoming out. Most unfortunately, neither the government nor the main opposition parties are seized of this continued ‘slowflation’ in the economy.

Its social consequences can be quite disastrous as employment opportunities dry up and the young people take to the streets and fuel the growth of extremist and lumpen violence in the country. It is time to take our attention away from scams and focus on the challenge of generating jobs and growth in the country.

The writer is Senior Fellow, Centre for Policy Research, New Delhi