Government Lowers FY13 Growth Forecast To 5.8%

After being in a denial mode for most part of the first half of this fiscal, the government finally seems to be reconciling to the fact that, growth after all would not be as much as was expected. In its mid-year economic analysis the government finally admitted that GDP growth for FY13 will be as low as 5.8%. After achieving a growth of 8.5% in FY11 and then 6.5 per cent in FY12, GDP finally seems to be slipping on growth which will be below the 6% mark this fiscal. This will be lower than what we achieved in FY09, the year which actually witnessed a financial and economic meltdown.

The recent slowdown has been all pervasive and sectors across the board have been responsible for the decline in the overall economic growth rate. The agriculture & allied sector has been hit the most with growth there coming down to 2.1% in the first half of the current fiscal (H1FY13) against 3.4% reported during the same period last year. A below normal monsoon in 2012-13, and more particularly, deficient rains in the month of June and July, considered to be the key months for sowing, is seen to be a reason for such a fall.

Besides this, the services sector that contributes to almost 60% of the of GDP and which has been driving the economy’s growth rate over the last couple of years (almost three fourth of the GDP growth since FY09 was driven by the services sector) saw a deceleration with the growth rate falling to 7% in first half of the current fiscal from 9.5% it achieved in the first half of FY12. The worst performer among the services sector was the trade, hotels, transport & communication segment that witnessed a 60% lower growth. This segment forms almost half of the entire services sector. Therefore, a slowdown in this segment was primarily responsible for the deceleration in the growth of the services sector. A slowdown in agriculture and industrial activity led to such a fall in the growth of this segment, as it is tightly linked to the activity of the other two sectors.

Industry in the first half of FY13 grew by just 3.2% compared to the 4.7% growth that it achieved during same time last fiscal. External factors weren’t too conducive, thereby leading to a fall in exports. This was further complicated by internal factors such as high interest rates which too had an impact on the investment in and the growth of the economy, particularly that of the industrial sector. 

We believe that this growth rate too is on little bit on the optimistic side as to achieve a 5.8 % growth the economy needs to grow by 6.2 per cent in the remaining two quarters. Looking at the international factors such as a looming US Fiscal Cliff and no permanent solution to the Euro zone debt crisis, growth will probably be lesser than 5.8%. Although the current reforms announced by the government will help the economy to regain its strength, we think it will be at least some time before we see the economy growing strongly. Until then, a sub-six per cent growth rate is what we would have to be happy with.