in first quarter of FY 13 as against 8% recorded in the corresponding period last year. The deceleration in GDP growth was reflected across all the three segments of the economy – agriculture, services and industries. The downside risks to growth may persist given the uncertain global economy and moderation in investment demand and necessitates addressing issues impeding infrastructure. Sharp deceleration of industrial growth and its various segments pose a serious down side risk to the GDP growth for FY 13. The Index of Industrial Production (IIP) for the month of July 2012 stood at 0.1% against a negative growth of 1.8% in June 2012. IIP was dragged down by fall in capital goods, mining and manufacturing sectors. Capital goods sector contracted by 5% in July 2012. Manufacturing output, which constituted 76% of overall industrial production, contracted by 0.2% in July 2012. During April-July 2012, IIP contracted by 0.1% (6.1%) with manufacturing sector growth at -0.6% (6.5%) and growth in capital goods at -16.8% (8.2%). Further, growth in consumer goods now also seems to be petering off. There is a high degree of volatility in month-to-month growth but the severe contraction in capital goods sector is a serious cause for concern. Capital goods recorded negative growth for the third consecutive month though the pace of contraction eased.
An expenditure switching strategy is needed to reduce government’s revenue spending by slashing subsidies with enhanced capital expenditure to crowd-in private investment. The Kelkar Panel report on fiscal consolidation has suggested raising resources through disinvestment and secondly cutting the non-plan expenditure to keep the fiscal deficit within 5.3-5.4 % against the budgetary target of 5.1 %.
4. High current account deficit (CAD). CAD of 4.2% of GDP in 2011-12, which is the highest since the balance of payments crisis of 1991, has implications for India’s external debt position and, consequently, for financial stability. A widening CAD in the face of worsening global economic and financial conditions and muted capital flows has accentuated pressure on the rupee. The CAD is being increasingly financed by debt flows, threatening long-term sustainability. 5. Inflation Risk. The persistence of inflation and inflationary expectations together with discernible slowdown highlights serious supply bottlenecks. While falling global commodity prices could aid in checking inflationary trends in the coming months, the potential impact of the lagged pass-through of rupee depreciation, suppressed inflation in energy and fertilisers and possible fiscal slippage pose a threat.
3. High Fiscal Deficit - Both fiscal and primary deficits have increased during 2011-12. Fiscal deficit was 5.9% in 2011-12. Fiscal risks remain elevated in FY 13. High fiscal deficit will widen the trade deficit an impact the BoP position. High fiscal defect also reduces the scope for further fiscal stimulus measures. Of the Rs. 5,69,616 crore Budgeted G-Sec Gross Borrowings for 2012-13, Rs. 3,36,000 crore (59 %) was completed till 12.09.2012.
February 2013
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