The Ruling Coalition Government led by the Corrupt Congress Party has accepted defeat that it can’t turn around the economy as it officially downgraded the GDP estimate to less than 5% and previous FY being the worst in the decade.
Growth by activity was led by agriculture up 4.6%, services up 6.9% while industry came in at 0.7%. On the
expenditure side, the 4.6% print was primarily led by net exports which contributed ~50% to the headline number. Investments (GFCF) painted a sorry picture, up 0.2% while consumption decelerated further to 4.4%.
Recent studies indicate that a sharp decline in capital productivity has resulted in India’s potential growth declining from 8% to 6.5% currently. This possibly explains why despite growth falling to a decadal low, inflation has remained near double digits and suggests that (1) the output gap is not as negative as earlier believed (2) It also indicates that interest rates are likely to remain higher for longer to contain inflation and elevated inflationary expectations.
Challenges for the Narendra Modi Led BJP Government from May 2014
Going forward, key to moving to a higher growth trajectory would be reviving investments to pre-crisis levels, especially private sector through continued efforts to “unlock” stalled investments. Here there is some traction on fast-tracking and ‘unlocking’ stalled projects and higher domestic savings, especially financial savings by containing inflation and positive real return.