Is 5% GDP growth a new normal?

Tue, 30 Jul Pre-Open

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Rewind a year back from today. Issues pertaining to rising fiscal deficit, worsening current account deficit (CAD), currency depreciation and ineffective decision making were grappling India. Between then and now several measures being taken by the government. For instance, fuel prices were de-regulated in this period. Government also announced a slew of measures like opening up of foreign investments in various sectors like retail and aviation. Reserve Bank of India (RBI) too adopted a dovish stance with easy monetary policy by gradually reducing benchmark repo rate over the last one year.

All these measures were expected to bring economic growth back on track. In fact, when there was hope that some of these measures may produce the desired results rupee played a spoilsport. US Fed's plans to taper quantitative easing (QE) led foreign investors to withdraw their money from emerging markets including India. This led to a significant depreciation of Indian rupee. High CAD and fiscal deficit made the matters even worse.

As a result, RBI resorted to monetary tightening, albeit indirectly. It hiked rates under money borrowed via marginal standing facility scheme. Limits were also put on overnight borrowing facility from the central bank. All these measures are likely to raise borrowing costs of banks. Higher rates can hurt capex cycle and thus growth. As a result, it seems that growth resurgence will be pushed back to 2014. Initially, it was believed that reform measures would be sufficient to put growth back on track. But steps taken by RBI to arrest the fall in rupee are likely to de-stabilize the growth prospects in near term by increasing the cost of funds.

Consensus figures over growth forecasts in FY14 have also been lowered (between 5-6%) across the board due to these measures. So, is even 5% GDP growth challenging for India from here on?

While it is difficult to put a number to growth figures amidst invariable contingencies we feel that we are pretty much at bottom of the growth cycle. It may be noted that right now deficit, growth and currency are all at decade lows. Now this does not mean that they can't go lower from here. However, the steps taken by government and RBI to restore growth are expected to have the desired effect sooner than later. Easing constraints on FDI will attract money to the country. Decontrol of petrol prices is expected to lower fiscal deficit. RBI's steps to curb gold imports may help on the CAD front.

Thus, multiple measures have been taken to resolve the deficit issues. Hence, the overall growth picture is encouraging. However, unless government takes steps to resolve the policy issues, infrastructure bottlenecks will continue to prevail. And till the time these bottlenecks remain growth may not come that easily.