India's GDP growth slowed further than expected in the year to December, falling to 4.5% from 5.3% in September. The good news is that lower than expected inflation in January means there is a bit more room for the Reserve Bank of India to cut interest rates. The bad news is the 2013 Budget failed to further address India's structural problems.
disappointing growth rate for the year to December will make it difficult for
the Government to meet its forecast growth rate for the 2012/13 (year to March
2013) of 5%. The weakness was across all
broad sectors of the economy. Net
exports remained weak on the back of soft exports, but still high imports
fuelled by still high imports of oil and gold.
pressures eased somewhat in January with the Wholesale Price Index (WPI)
falling to 6.62%, down from 7.18% in December.
The CPI remained elevated at 10.79%, however policymakers continue to
focus on the WPI in India.
Reserve Bank of India (RBI) last cut the policy repo rate by 0.25% in
January. That followed a long 9-month
stand-off between the government and the central bank over the need for broader
policy changes (particularly lower government spending and reform in the goods
market). The rate reduction was on the
back of some moderation in inflationary pressures but was also partly reward
for positive moves from the Government late last year to open up the retail and
aviation sectors and ease caps on capital inflows.
inflation number in January provides scope for further rate cuts. However, the RBI has stated that scope for
further interest rate reductions remains limited. I think they will cut rates by another 50
view on its room to move won't have changed with the release of the
Government's 2013 Budget last week. The
Budget left deficit projections for the current and next financial year largely
unchanged at 5.2% in FY 2012/13 (previously 5.3%) and 4.8% in 2013/14
than reducing unsustainable subsidy expenditure, the Government increased
subsidies from 1.82 trillion rupees in 2012/13 to 2.4 trillion rupees in
2013/14. That will be funded by a 1-year
10% surcharge on higher income citizens along with higher import duties on some
luxury items. That's not my definition
of structural budget reform.
Government also announced higher spending in education and health and an
increase in capital spending. It's hard
to argue about investment in those areas, but he quality of the outputs remains
to be seen. And it would have been
preferable for increased expenditure in those areas to be funded by lower
spending on subsidies.
of GDP growth, the Government's forecast for FY 2012/13 remains at 5.0% with an
increase to between 6.1% and 6.7% expected in FY 2013/14. My forecasts are 4.8% and 5.8% respectively.
Government's growth forecasts are still well shy of their stated aspiration of
8.0% growth. India saw growth rates in
excess of that level following the GFC, but with that high growth came sharply
higher inflation, indicating that growth of that level was well in excess of
Government wants to achieve sustainable 8% growth, they need to get serious
about measures to enhance productivity and improve their budget
fundamentals. In that respect Budget
2013 was a lost opportunity.