Is 5-6 % GDP growth the new normal?

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Is 5-6 % GDP growth the new normal?
The Central Statistical Organisation stunned economists on Thursday when it projected GDP for 2012-2013 at a dismal 5 per cent.

The government and Finance Ministry officials were also bowled by the googly and failed to understand the logic behind such a poor GDP estimate.

But the country's chief statistician, T C A Anant, whose office compiled the data and released it on Thursday, was quoted in the Indian Express as saying, "Our calculation of the advance estimate (of national income) is based on the methodology prescribed in the National Accounts Estimates."
If the GDP does hit 5% as estimated by the CSO then it is at a 10 year low figure, compounding worries for the government, which perhaps is running its last lap before general elections next year.

Gone are the heydays when the GDP growth was a robust 9%

For several quarters now the GDP growth has remained tepid and sluggish with investment simply not picking-up. In fact, a GDP of 5-6 per cent is now set to become a new normal for the economy. The real problems for the economy is high inflation, a balloning fiscal deficit and high current account deficit which limit the possibility of any stimulus to push growth.

In fact private investment which helps push growth rates has taken a severe beating, with the red-tapism, bureaucratic hurdles and litigation putting a permanent pause on infrastructure development. High interest rates only compound the investment misery. With inflation at elevated levels there is no way that interest rates could fall leading to a pick-up in investment demand.

An alarming drop in the savings rate is another cause for worry. Nomura Research in a recent report estimates that domestic savings rate is likely to fall to a decade low of 27% of gross domestic product (GDP) for FY13. The savings rate was 30.8% at the end of March 2012.

Clearly, industrial activity and the services sector are unable to propel GDP in a big way. The agricultural sector has problems of its own.

The coming years are unlikely to see huge jump in GDP as the government is running a huge fiscal deficit to push any stimulus through. With inflation at elevated levels an over ambitious interest rate cut could spell disaster for the economy. And high interest rates are most likely to affect investment and hence the GDP.

It's now time to get used to the 5-6 per cent growth rate, which could perhaps scale to 7 per cent. Anything beyond that would require an herculean effort from the government.

GoodReturns.in

Read more about: gdp, cso
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