Column: It's the interest rate, stupid

Aug 31 2013, 08:50 IST
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SummaryWith real rates of interest at 9%, it is no wonder GDP is crawling, to a 16-quarter low of 4.4%

The GDP data for the second quarter of this year has just been released and it paints a crisis picture for the economy. The year-on-year (yoy) GDP growth rate came in at 4.4%, making it the third successive quarter when GDP growth has come in below 5%. The previous two quarters yoy GDP growth registered 4.8% and 4.7%, respectively. If this fiscal year (2013-14) GDP growth comes in below 4.8%, it will mark the third slowest GDP growth since 1991, with the slowest growth observed in both 1997 and 2000, at 4%.

In his address to the nation yesterday, the PM talked of a 5.5% growth for the fiscal year. Given that we have the yoy data for the first quarter (Zyfin Research recently published near perfect forecasts of GDP and deflator growth, both sequential and yoy), sequential quarterly growth in this quarter is around 4.2%, SAAR. Thus, sequential growth rate for each of the next three fiscal quarters will have to be close to 6% to meet the PMs forecast. There are some other scary implications. The finance minister earned the trust and confidence of many when he kept to his fiscal deficit promise of 5.2% of GDP for FY2012-13. For 2013-14, the target was ambitiously lowered to 4.8% of GDP. Contained in these estimates is tax revenue growth of close to 19%, expenditure growth of 16.3%, and nominal GDP growth of 12.8%. It is near impossible that the finance minister will even come close to the 4.8% deficit target. Nominal GDP growth expanded by 10.2%. Simple maths suggests that in order to meet the FMs nominal GDP growth target of 13%, the Indian economy will have to expand at a 14% nominal annualised rate in each of the next three quarters. This is simply not possible.

This low growth rate cannot be ascribed to external factors, US FED tapering etc. Most of our GDP decline is home-grown, and it is encouraging to note that several policymakers have admitted in recent days that it is not the outsiders, stupid. Both the FM and Subbarao are absolutely right (unlike the UPA apologists who believe that what is the problem all countries are more or less equally affected) or misguided experts who believe that 10% (food)-CPI inflation and 4% GDP growth is a sign of an overheated economy.

Potentially, there are two sources of grief for an economyfiscal and monetary policy. Regarding fiscal

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