Gross capital formation, going by CSO?s latest estimate of what FY13 GDP is likely to be, has actually picked up pace, growing from 1.5% in FY12 to 3.9% in FY13. So why is it that, despite this, GDP is expected to grow just 5% this fiscal versus 6.2% in the last fiscal? While the halving of consumption growth and the slowing of exports has been a big factor, a large part of the explanation lies in the impact of various bans in sectors like coal and iron ore. In the case of the 1,06,000 MW of coal-based power, for instance, around 15% of current capacity is rendered useless due to lack of coal, something which Coal India has repeatedly said is a result of the current ?go? ?no-go? policy on mining. If that isn?t bad enough, another 43,000 MW of fresh capacity that is expected to come on stream by FY16 is also likely to function at just 40% levels based on current projections of coal production. In other words, India?s gross capital formation may show an increase, but the impact of this won?t show up in the GDP growth numbers as there is little or no extra output from this investment?indeed, the fresh investment will add to overall demand and, in the absence of a commensurate output increase, to overall inflation levels. In the case of power plants run on natural gas, over two-thirds of capacity has been lost due to unavailability of gas?while some part of this is due to the fall in Reliance Industries? gas output from the KG Basin, the fact that defence ministry objections has prevented oil exploration in more than 70 blocks in the country is a major factor in holding back fresh discoveries. The blocks affected by the defence ministry?s actions include those belonging to oil majors like RIL, ONGC and Cairn.
This, of course, is why it is so important that the Cabinet Committee on Investments (CCI) process gets off the ground at the earliest and is able to report some meaningful success stories since, more than any proposal in the budget, this is what will get GDP going. Indeed, when GDP gets going, several critical parameters like the tax-to-GDP ratio or expenditure like on subsidies will automatically begin to look a lot better. Take corporate taxes which have fallen, from 3.8% of GDP in FY08 to a budgeted 3.7% of GDP in FY13?the actuals could be even lower due the fall in India Inc?s profitability.
Even more important is the likely impact on the current account deficit that the RBI Governor has said will be even higher in Q3 than it was in Q2 when it touched a record 5.4% of GDP. In FY08, India exported $11.2 billion of iron ore and steel and this fell to just $3.9 billion in the first half of FY13, a result of both mining bans and the Chinese slowdown. In FY08, net exports of iron ore and steel financed nearly 17% of the current account deficit whereas in the first half of FY13, net exports turned negative at nearly $2 billion. In other words, dealing with environment hurdles will be critical for both India?s GDP as well as for its current account deficit.
