Listing out a host of positives including “a visible buoyancy in the capital markets” and “the resurgence of growth in manufacturing sector,” the government on Monday exuded confidence that “moderate acceleration” in the rate of GDP expansion in the second half would take growth in 2012-13 to 5.7-5.9%. In its mid-year economic analysis tabled in Parliament, the finance ministry also predicated its forecast on an expected early softening of the Reserve Bank of India's monetary policy stance down the line, enabled by a likely further moderation in inflation from the fourth quarter and “benign” global commodity prices.
Despite the April-October fiscal deficit being 72% of what was estimated for the full fiscal year in the Budget, the ministry assessed that the deficit would be contained at 5.3% of the GDP in 2012-13, in line with the road map announced by finance minister P Chidambaram a few weeks ago. The main author of the piece of analysis, chief economic adviser Raghuram Rajan, however, slightly discounted the optimism later while speaking to media persons, where he said achieving the (revised) target would be a “tough task”.
Rajan stressed the need for “further steps” to boost growth including “a good, confidence-inducing Budget”, speeding up clearance for projects and more capital market reform measures.
Economists, independent of the government, acknowledged that the new official estimate of growth was far more realistic than the widely off-the-mark 7.6% made in the last Budget, but cautioned that even the current estimate could be some 200-300 basis points higher than what the growth rate would be this year. The economy grew at 5.4% in the first half.
The government's estimate that the economy may have bottomed out is bolstered by the “positive upturn in the business expectation index in October-December quarter, higher purchasing managers' index in November etc. (A low-base-enabled unexpected rise industrial production index by 8.2% in October and an eight-month low a wholesale inflation rate of 7.24% in November have been added to the assortment of data later).
However, there is a set of disconcerting data, which the ministry's analysis doesn't quite highlight. The growth in gross fixed capital formation in the first half, for instance, was less than a third of that in the corresponding period a year ago at 2.3%. Even private consumption expenditure growth was lower at 3.8% in H1 this year as against 4.7% in H1 last year. The high fiscal deficit is reflected in an