With FY14 GDP growth coming in at even lower than the advance estimate of 4.9%?it came in a 4.7%?and an El Nino-induced drought likely, the task ahead for prime minister Narendra Modi has become even more enormous. Economic growth has been falling for three straight years, and has been below 5% for eight straight quarters now, barring one. Given that agricultural growth in the last four quarters has been an above-average 4.7%?versus FY13?s 1.4%?this means ex-agriculture GDP is actually much lower than it was in FY13 even though the headline numbers show a growth in GDP. While agriculture has been booming?this will likely show a contraction in FY15?manufacturing remains in a shambles. Though growth has contracted a little bit less in Q4, overall growth during the year has been -0.7% versus the very low 1.1% in FY13, 7.4 in FY12 and 11.3% in FY10. Though trade, hotels, transport and communication?the largest segment of services?grew a little bit faster in Q4, its growth in the full year was a mere 3% or a full 40% lower than it was in FY13; in FY10, this segment grew just under 8%.
While private consumption growth has picked up a bit, its share has fallen to a mere 54.7% of GDP in Q4?for the full year, though, it remains at FY13?s level of 57.1% of GDP. Government consumption levels also remain unchanged, but the problematic part is that gross fixed capital formation has slumped even further, to 28.3% of GDP, down from even FY13?s 30.3% and dramatically lower than 32.9% in FY08, the highest levels ever in India. This has been compounded by the fact that the productivity of capital has fallen to a two-decade low with the FY13 incremental capital output ratio (ICOR) rising to 5.9 compared to a historic 4.5 or thereabouts. In other words, even if you forget the falling productivity of capital and assume a stable ICOR of 4.5, the fall in gross fixed capital formation means India?s optimum growth levels have fallen by over 1 percentage point since FY08.
Some part of the problem of rising ICOR and falling investment levels, it is easy to believe, will get fixed once stuck projects come on stream?the environment ministry?s expert panel, for instance, is meeting to clear R80,000 crore worth of projects. But since the clearances are multi-layered, getting an environment clearance means little if the states can?t acquire the land. And even fixing that is of little relevance if India Inc is over-leveraged and banks under-capitalised. You?ll have to give Modi some time.
