According to the Economic Outlook 2013-14, the economy will grow by 5.3 per cent, far below the 6.4 per cent projected earlier.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.A critical component — manufacturing — has yet to show signs of revival. Between April and July, it actually declined by 0.2 per cent. 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.Reserve Bank of India governor Raghuram Rajan’s recent announcement allowing banks to borrow from global capital markets at a time when interest rates are rising because of the expected reversal of the United States Federal Reserve’s easy money policy is tailored to this logic. Indian banks can now borrow up to 100 per cent of their combined net worth and long term borrowings from the international market (compared to 50 per cent earlier) and then “swap” them with the central bank. This is expected to augment the supply of foreign exchange by an estimated $30 billion, which is about one-tenth of Indian foreign exchange reserves.The share of capital inflows — external borrowings, foreign direct investment (FDI) and foreign institutional investors (FII) — increased from about 5-6 per cent of GDP to about 9 per cent in 2011. The share of costlier short-term borrowings (almost entirely by private companies) in overall borrowings increased from 4.5 per cent in 2002-03 to 25 per cent in 2012-13. Companies, lulled into borrowing at illusorily low interest rates, have been surprised by sharp increase in the rupee-denominated value of their loans.
Posted on: Tue, 17 Sep 2013 04:26:45 +0000
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