JEDDAH – India's double-deficit ridden economy continues to get hit by both internal and external factors, Dana Al-Fakir, economist at Asiya Investments, an investment firm specializing in emerging Asia investments, said Sunday. The economy slowed down from 5.3 percent year-on-year in the second quarter to a lower-than-expected growth rate of 4.5 percent year-on-year, in the quarter ending in December, the report prepared by the Research Department of the KuwaitChina Investment Company (KCIC) said. The slowdown is mostly attributed to the lackluster performances being put on by the agriculture, mining and manufacturing sectors. The weakness of the manufacturing sector is captured by the nation's industrial production (IP) figure, where manufacturing accounts for three quarters of total production. Against expectations IP posted its second consecutive contraction in December of -0.6 percent. Gains in the manufacturing sector continue to dwindle due to poor domestic consumption, investment and export levels, leading to a fall in consumer and capital goods. This in turn is having an impact on the mining sector: as manufacturing activity slows, there is less demand for commodities. Domestic consumption remains sub-optimal as purchasing power is persistently eroded by high levels of inflation. The widening fiscal deficit has had negative repercussions on the country's investment-grade credit rating, discouraging foreign investment. Exports are tepid due to the debt-ridden eurozone, India's key trading partner. Performance is not expected to improve on the export front as the eurozone is likely to log in another contraction this year. However, following the announcements made during the annual Union Budget meeting, we may see an uptick in the government's contribution to economic growth in the coming months. Real gross domestic product (GDP) is a measure of the economic output or of the size of the economy - adjusted for inflation or deflation. It is the sum of the values of all final goods and services produced by that country or region over a given time period. Real GDP is a measure that holds prices constant by using a given year's value (the base date) for all items and services. GDP can be measured in several ways. The Central Statistical Organization of India, the government body responsible for national accounts data, publishes GDP by expenditure and sector output. The following graph illustrates the expenditure breakdown of GDP, and shows how much growth came from private consumption, government expenditure, fixed capital investments, exports and imports. Investment has been the engine behind India's robust growth since 2003, and is essential given the vast amount of infrastructure needed. Also, private consumption is a major component of the services-driven country, making it much more domestic than the rest of Asia. The nation's growth rate has been on a downward trend since mid of last year and is expected to log in a growth rate of 5 percent year-on-year, in the current fiscal year ending this month. This is far below the 7.6 percent growth rate that was forecasted in last year's budget. The sub-par performance in economic growth is undeniably sending a clear message to the government: that there is no time for complacency, even after the Reserve Bank of India (RBI)'s policy rate cut in January. Since September of 2012, the government stepped up its efforts to bolster economic growth: it eased restrictions on foreign investments in sectors such as retail, civil aviation, insurance and pension, and also hiked diesel prices in a bid to curb subsidies and bring its fiscal deficit down. However, there is still room for improvement. The government's inefficient response to tackling infrastructure deficiencies and policy constraints such as delays in permitting environmental clearances and granting the right to acquire land for projects, are just some of the obstacles stalling productivity. Subsequently, under intensifying pressure to deliver a growth-orientated fiscal budget plan, the Finance Minister Chidambaram announced a surprise 16 percent increase in public expenditure to reinvigorate the economy, during the Budget Union meeting last month. However, the minister also pledged to bring down the burgeoning fiscal deficit, from 5.2 percent of gross domestic product (GDP) in the current fiscal year, down to 4.6 percent in the next financial year beginning on April 1st, by unleashing new taxes on the wealthy and large businesses. This comes especially as both the growing fiscal and current account deficits may lead to a sovereign rating downgrade, which would further tarnish the nation's investment prospects. A growth-aimed fiscal plan is strongly needed if the government of Prime Minister Singh wants to win the support of its people ahead of the elections in early 2014. – SG
