Our worst fears have been confirmed. GDP growth continues to plummet and is now at a four-year low of 4.4 per cent for the first quarter of the current financial year.

This should hopefully stop all loose talk of ‘plateauing of growth’ and sightings of green shoots of recovery. And it will hopefully also put an end to the argument that this remarkably poor performance is due entirely to exogenous factors, and not a result of mismanagement and simply lack of policy direction. I suppose the RBI Governor knew these numbers on Thursday when in his speech he tried to place the entire onus for this poor performance on the Government, and distance RBI from the debacle.

We are all in for a bout of hand-wringing and passing the buck as the next quarter will only bring worse news. How far would the Prime Minister's Economic Advisory Council be prepared to bring down GDP growth rate to fight its imaginary inflationary demons?

Would the dream team continue to look for quick fixes while going along with fiscal deficit increasing measures? Or will it take the courage to tell its UPA political masters that the continued decline in growth rate will have the worst possible impact on the poor — and they will not be protected by either the food security Bill or the Land Acquisition (Rehabilitation and Resettlement) Bill?

The scary feature of the GDP data released on Friday is the decline in manufacturing sector growth rate and in the gross fixed capital formation. Manufacturing is actually shrinking in a country where manufactured imports from China are on the rise.


And, investors are simply on strike; the negative growth represents they are voting with their feet — with capital outflow against the Government's policies and performance. In this situation, is it not a cognisable offence to pass the two Bills, of which the FSB threatens to bust the fiscal balance and the LARR will undoubtedly make investors even more wary of considering any capacity expansion in the manufacturing sector? Is it not patently dishonest to now talk of the agriculture sector, boosted as it may well be by a good monsoon, to pull the economy out of its slump? Why do our policymakers forget that the agriculture sector’s share is a mere 13 per cent of our GDP?

With the RBI having wielded its liquidity contracting axe and pushing up market interest rates, the rupee plunging to record lows in July and August, and Government adding to the misery by worsening the investment climate through the passage of the two Bills, we can hardly expect the second quarter (July to September) to be any better than the previous one. If anything, GDP growth in the second quarter will be even lower.

I do not see any reason to believe that growth rate will recover in the second half. With the Damocles sword of the credit downgrade hanging over the Finance Minister, there is no scope for expansion in public expenditure.

Consumer sentiment seems to be in the dumps as reflected in the slowest growth in a decade or more in private consumption expenditure. With rising interest rates, and higher land prices, consequent upon the enactment of LARR, there is hardly any chance of an upward tick in housing or consumer durable demand.

Food inflation is seriously eroding purchasing power, and we cannot expect a rise in the demand of consumer non-durables either. With a government in office that seems not to bother at all about investors’ sentiments and interest rates remaining high along with continuing payment difficulties in public-private partnership projects, we are in for a further slowdown in investment demand as well.

And with each passing month we draw closer to the elections, which will encourage investors to shelve their decisions. On these counts, the second half will, in all likelihood, be even weaker than the first.


The only upside could come from rising exports, bolstered by the depreciating rupee and the growth pick-up in the US and Europe. But with iron ore exports still suffering from the ban on mining, and manufactured sectors not particularly competitive, this export-led boost could be weaker than expected.

The other hope is that disbursements will pick up on the projects on investment recently cleared by the Cabinet committee. Here again, the problem is that if these are public sector projects, they will face an expenditure constraint. And in the case of private sector projects, investors will not be in a mood to increase their capital outlays in the face of high interest rates and rising political uncertainty.

Therefore, GDP growth in the second half could well be even weaker than the first half. We will be lucky to get a GDP growth of 4.5 per cent in 2013-14. And this does not account for some major shocks coming from global oil prices, or FIIs further deserting the Indian market, or NRIs deciding to pull out their deposits. These would expose the economy to a nasty external sector shock.

How one wishes we had a political class with some sense of national priorities and which was prepared to take tough necessary measures, rather than be only concerned with their own narrow and short-term partisan interests. These will simply take us over the cliff into a situation from which there will be a lot of pain climbing back up.

(The author is Senior Fellow, Centre forPolicy Research.)