Reflecting the slowdown in the domestic economy, growth in aggregate demand weakened further
during Q4 of 2011-12. The decline in investment, particularly private corporate investment,
has emerged as a major drag on demand. From a long-term perspective, the sustained fall in
investment so far has impacted India’s growth potential. Some moderation in private consumption
is also taking place, partly due to the impact of inflation on purchasing power. Corporate sales
decelerated along with continued decline in profits and could adversely impact investments
ahead. In this situation, crowding-in of private investment demand by public investment spending
stimulus while aggressively cutting expenditure on subsidies hold the key to growth revival.
Expenditure side of GDP continued to
show weak demand
II.1 The expenditure side aggregates, based
on the revised estimates of national income
released by the CSO in end-May 2012, are
indicative of slackening demand conditions in the economy (Table II.1). This assessment
however, is strongly influenced by the ‘statistical
discrepancy’ in the data. For example, the sum
of the contribution-weighted growth rates of the
different expenditure components in Q4 of
2011-12 works out to 9 per cent, which is much higher than the growth rate of 5.6 per cent
derived from the supply side after adjusting for
net indirect taxes (Table II.2). Such ‘statistical
discrepancy’ is also reflected in the incorrect
manifestation of external demand through
positive net exports in Q4 of 2011-12 in contrast
to the record current account deficit posted in
the data that were released by the Reserve Bank
in end-June 2012.
Table II.1: Expenditure Side GDP (2004-05 prices) |
(Per cent) |
Item |
2010-2011* |
2011-12# |
2010-11 |
2011-12 |
Q1 |
Q2 |
Q3 |
Q4 |
Q1 |
Q2 |
Q3 |
Q4 |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
9 |
10 |
11 |
Growth Rates (y-o-y) |
I. GDP at market prices |
9.6 |
6.9 |
9.5 |
8.9 |
10.0 |
9.7 |
9.0 |
6.9 |
6.2 |
5.6 |
II. Total Consumption Expenditure |
8.1 |
5.4 |
9.4 |
8.8 |
6.9 |
7.4 |
4.9 |
4.9 |
6.1 |
5.8 |
(i) Private |
8.1 |
5.5 |
9.1 |
8.6 |
7.3 |
7.6 |
4.9 |
4.6 |
6.4 |
6.1 |
(ii) Government |
7.8 |
5.1 |
11.1 |
10.5 |
4.7 |
6.7 |
4.9 |
7.2 |
4.7 |
4.1 |
III. Gross Fixed Capital Formation |
7.5 |
5.5 |
8.8 |
6.9 |
11.1 |
3.7 |
14.7 |
5.0 |
-0.3 |
3.6 |
IV. Change in Stocks |
37.4 |
2.4 |
39.4 |
35.5 |
37.7 |
37.1 |
7.1 |
2.8 |
0.4 |
-0.4 |
V. Net Exports |
5.5 |
-30.7 |
-35.4 |
-14.6 |
29.5 |
33.4 |
-23.2 |
-46.7 |
-117.9 |
117.8 |
VI. Discrepancies |
38.9 |
-112.7 |
-1.0 |
11.1 |
91.1 |
7.3 |
-51.8 |
-119.6 |
-152.0 |
-124.0 |
Relative shares |
I. Total Consumption Expenditure |
70.1 |
69.1 |
72.8 |
72.1 |
72.7 |
63.5 |
70.1 |
70.8 |
72.7 |
63.6 |
(i) Private |
58.7 |
57.9 |
61.9 |
61.7 |
60.3 |
51.9 |
59.5 |
60.3 |
60.4 |
52.2 |
(ii) Government |
11.4 |
11.2 |
11.0 |
10.5 |
12.5 |
11.6 |
10.6 |
10.5 |
12.3 |
11.4 |
II. Gross Fixed Capital Formation |
32.5 |
32 |
32.2 |
34.0 |
32.3 |
31.4 |
33.9 |
33.4 |
30.3 |
30.9 |
III. Change in Stocks |
3.7 |
3.5 |
3.7 |
3.8 |
3.5 |
3.6 |
3.7 |
3.6 |
3.4 |
3.4 |
IV. Net Exports |
-6.0 |
-7.4 |
-7.6 |
-8.2 |
-5.4 |
-3.4 |
-8.6 |
-11.3 |
-11.1 |
0.6 |
V. Discrepancies |
-2.5 |
0.3 |
-3.8 |
-4.3 |
-5.4 |
2.7 |
-1.7 |
0.8 |
2.6 |
-0.6 |
Memo: |
(` Billion) |
Real GDP at market prices |
52368 |
56277 |
12087 |
12265 |
13533 |
14484 |
13174 |
13111 |
14377 |
15296 |
* : Quick Estimates. # : Revised Estimates.
Note: As only major items are included in the table, data will not add up to 100.
Source: Central Statistics Office. |
Table II.2: Contribution-Weighted Growth Rates of Expenditure-Side GDP
(2004-05 Prices)* |
(Per cent) |
Item |
2010-11 |
2011-12 |
Q1 |
Q2 |
Q3 |
Q4 |
Q1 |
Q2 |
Q3 |
Q4 |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
9 |
1. Private final consumption expenditure |
5.6 |
5.3 |
4.5 |
4.0 |
3.0 |
2.8 |
3.9 |
3.2 |
2. Government final consumption expenditure |
1.2 |
1.1 |
0.6 |
0.8 |
0.5 |
0.8 |
0.6 |
0.5 |
3. Gross fixed capital formation |
2.9 |
2.4 |
3.6 |
1.2 |
4.7 |
1.7 |
-0.1 |
1.1 |
4. Changes in stocks |
1.2 |
1.1 |
1.1 |
1.1 |
0.3 |
0.1 |
0.0 |
0.0 |
5. Valuables |
0.8 |
0.7 |
0.6 |
0.5 |
0.3 |
0.2 |
0.1 |
0.2 |
6. Net Export (i-ii) |
-2.2 |
-1.1 |
2.5 |
1.9 |
-1.8 |
-3.8 |
-6.4 |
4.0 |
(i) Exports |
2.6 |
3.7 |
6.0 |
6.3 |
3.9 |
4.4 |
1.5 |
4.6 |
(ii) Less Imports |
4.8 |
4.8 |
3.5 |
4.4 |
5.7 |
8.2 |
7.9 |
0.6 |
7. Sum 1 to 6 |
9.5 |
9.3 |
12.9 |
9.5 |
7.0 |
1.8 |
-2.0 |
9.0 |
8. Discrepancies |
0.0 |
-0.5 |
-2.8 |
0.2 |
2.0 |
5.1 |
8.2 |
-3.4 |
9. GDP at market prices (7+8) |
9.5 |
8.9 |
10.0 |
9.7 |
9.0 |
6.9 |
6.2 |
5.6 |
*: Contribution-weighted growth rate of a component of expenditure side GDP is obtained as follows:
(Year-on-Year change in the component ÷ Year-on-Year change in GDP at constant market prices) ×
Year-on-Year growth rate of GDP at constant market prices.
Source: Central Statistics Office |
II.2 Keeping aside the apparent statistical
weaknesses in the data, the moderation in
expenditure persisted in Q4 of 2011-12, which
was reflected across private and government
final consumption expenditure and subdued
growth in capital formation.
Growth slowdown is reflected in weaker
growth in private consumption and
investment
II.3 The growth in private final consumption
expenditure, which accounts for around 60 per
cent of GDP, decreased in Q4 of 2011-12. The
subdued levels of gross fixed capital formation
(GFCF), which accounts for around 30 per cent
of GDP, can be partly attributed to high interest
rates but non-monetary factors have also played a significant role. In this context, it may be
mentioned that real interest rates in the recent
period are lower than their levels in the precrisis
years when investment rates were much
higher. The moderation of investment in the
recent period, therefore, suggests that there are
factors other than interest rate at play. Empirical
estimates in a recent Reserve Bank Working
Paper show that the real interest (lending) rates
explain only around one-third of real GDP
growth. In the post crisis period, the slackening
of investment is mainly related to the private
corporate sector. In addition, the share of public
investment in GDP has declined. Apart from the
erosion in corporate profit margins and already
high leverage, other domestic and global factors
have contributed to weakening investment
activity.
Investment outlook remained insipid in Q4
of 2011-12
II.4 Corporate investment intentions remained
depressed. The aggregate project cost envisaged
from the new projects sanctioned financial
assistance by banks/FIs, have continued to
moderate through 2011-12 aggregating `2.1 trillion in 2011-12, down from `3.9 trillion in
the previous year (Table II.3). Industry-wise
analysis revealed that the share of the power
sector in the total envisaged project cost
remained the highest in Q4 of 2011-12 followed
by metal & metal products and textiles
(Chart II.1).
Table II.3: Institutionally Assisted Projects and Their Envisaged Cost (Quarter-wise) |
Period |
Number of Projects |
Project Cost (` billion) |
1 |
2 |
3 |
2009-10 |
Q1 |
146 |
908 |
|
Q2 |
189 |
1,327 |
|
Q3 |
175 |
1,194 |
|
Q4 |
231 |
827 |
2010-11 |
Q1 |
181 |
1,250 |
|
Q2 |
202 |
1,067 |
|
Q3 |
160 |
787 |
|
Q4 |
167 |
821 |
2011-12 |
Q1 |
154 |
787 |
|
Q2 |
194 |
572 |
|
Q3 |
151 |
506 |
|
Q4 |
169 |
255 |
Note: Based on data reported by 39 banks/FIs. |
II.5 The time-phasing details of projects that
have been sanctioned institutional assistance for
various years up to 2011-12 indicate that total
intended capital expenditure by private corporate
(non-financial) firms declined in 2011-12 and
can be expected to decline further during
2012-13 as planned investment in new projects is likely to remain low (Table II.4). Overall,
declining trend in investment demand from the
private corporate sector has emerged as the
major drag on overall investment.
Moderation in sales growth coupled with
high input cost pressures led to declining
corporate profits
II.6 Sales growth for select Non-Government,
Non-Financial (NGNF) listed companies by and
large held up during 2011-12, though there was
a perceptible drop in the last quarter (Table II.5,
II.6). However, persistent pressure from input
costs and rising interest outgo, led to decline in
net profits (PAT). Operating and net profit
margins declined during 2011-12 indicating a
weakening pricing power for Indian corporates.
Table II.4: Phasing of Capital Expenditure of Projects Sanctioned Assistance by Banks/FIs |
(` billion) |
Capital Expenditure in the Year |
Up to 2007-08 |
2008-09 |
2009-10 |
2010-11 |
2011-12 |
2012-13 |
Beyond 2013-14 |
Grand Total |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
9 |
Year of Sanction |
|
|
|
|
|
|
|
|
Up to 2007-08 |
1,826 |
1,317 |
583 |
376 |
98 |
47 |
- |
4,247 |
2008-09 |
265 |
1,029 |
864 |
568 |
366 |
84 |
46 |
3,223 |
2009-10 |
2 |
444 |
1,359 |
1,216 |
804 |
320 |
111 |
4,255 |
2010-11 |
- |
3 |
320 |
1,101 |
1,095 |
823 |
584 |
3,926 |
2011-12 |
- |
- |
39 |
254 |
746 |
638 |
443 |
2,120 |
Grand Total # |
2,093 |
2,793 |
3,165 |
3,515 |
3,109 |
1,912 |
1,184 |
- |
#: The estimates are ex ante, incorporating only the envisaged investment, and thus are different from those actually realised/ utilised. |
Table II.5: Corporate Sector- Financial Performance |
per cent |
Item |
Annual: 2010-11 |
Annual: 2011-12 |
2010-11 |
2011-12 |
Q1 |
Q2 |
Q3 |
Q4 |
Q1 |
Q2 |
Q3 |
Q4 |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
9 |
10 |
11 |
No. of Companies |
2273 |
|
Growth Rates (y-o-y) |
Sales |
20.0 |
18.6 |
25.1 |
19.2 |
17.1 |
20.7 |
22.6 |
19.1 |
19.5 |
15.5 |
Change in stock |
80.4 |
-23.0 |
391.7 |
-55.5 |
108.5 |
124.0 |
-41.7 |
3.4 |
99.2 |
-55.9 |
Expenditure, of which |
22.3 |
20.9 |
29.6 |
20.3 |
19.0 |
22.9 |
23.0 |
22.7 |
25.4 |
16.5 |
Raw Material |
26.3 |
22.7 |
37.8 |
22.3 |
20.3 |
25.2 |
27.6 |
23.1 |
26.1 |
17.0 |
Staff Cost |
19.3 |
17.6 |
16.5 |
20.5 |
21.2 |
19.5 |
19.9 |
17.4 |
18.8 |
14.4 |
Power & fuel |
18.1 |
27.2 |
17.5 |
12.8 |
19.6 |
26.6 |
27.2 |
26.2 |
30.4 |
25.3 |
Operating Profits (PBDIT) |
12.3 |
1.7 |
15.2 |
7.3 |
11.0 |
16.5 |
12.5 |
-1.1 |
-6.0 |
-1.4 |
Other Income* |
2.0 |
41.4 |
-26.2 |
55.1 |
6.1 |
-14.6 |
45.4 |
28.3 |
70.6 |
47.6 |
Depreciation |
16.2 |
10.5 |
20.2 |
17.6 |
14.7 |
14.6 |
9.7 |
9.7 |
10.3 |
11.2 |
Gross Profits (PBIT) |
10.0 |
4.2 |
8.1 |
9.0 |
9.5 |
11.9 |
16.5 |
-0.4 |
-3.2 |
2.5 |
Interest |
20.5 |
35.8 |
27.0 |
6.3 |
24.1 |
30.6 |
22.3 |
46.2 |
41.9 |
34.4 |
Tax Provision |
11.3 |
11.3 |
5.2 |
8.3 |
4.8 |
2.7 |
22.1 |
4.3 |
-3.1 |
4.5 |
Net Profits (PAT) |
9.0 |
-11.8 |
5.5 |
9.6 |
8.9 |
13.2 |
6.9 |
-15.6 |
-32.2 |
-7.7 |
|
Select Ratios |
Change in stock# to Sales |
1.8 |
1.3 |
2.6 |
0.7 |
1.3 |
2.4 |
1.2 |
0.5 |
2.3 |
1.1 |
Interest Burden |
19.7 |
27.9 |
20.9 |
19.5 |
19.8 |
19.0 |
22.0 |
28.8 |
28.9 |
27.3 |
Interest Coverage |
5.1 |
3.6 |
4.8 |
5.1 |
5.1 |
5.3 |
4.6 |
3.5 |
3.5 |
3.7 |
PBDIT to Sales |
15.8 |
13.6 |
16.3 |
15.6 |
16.1 |
15.4 |
15.0 |
13.0 |
12.6 |
13.1 |
PBIT to Sales |
13.6 |
12.1 |
13.6 |
13.5 |
13.6 |
13.4 |
13.0 |
11.3 |
11.0 |
12.2 |
PAT to Sales |
8.5 |
6.3 |
8.6 |
8.6 |
8.4 |
8.6 |
7.5 |
6.1 |
4.8 |
6.9 |
*: Other income excludes extraordinary income/expenditure if reported explicitly.
#: For companies reporting this item explicitly.
Note: Growth rates are percentage changes in the level for the period under reference over the corresponding period of the previous year for common set of companies. |
II.7 Growth in sales (y-o-y) remained strong
in the first three quarters of 2011-12 before
moderating in Q4 of 2011-12. On a sequential basis, however, sales picked up in the latter half
of the year. During Q4 of 2011-12, there was
also some decline in the rate of growth of input costs as well as interest outgo on a year-on-year
basis. The build-up in inventory, however, was
lower in Q4 of 2011-12 partly neutralising the
higher built-up observed during the previous
quarter.
Table II.6: Corporate Sector- Financial Performance (Sequential Growth) |
Q-on-Q, per cent |
Indicator |
Number of Companies 2273 |
2010-11 Q1 |
2010-11 Q2 |
2010-11 Q3 |
2010-11 Q4 |
2011-12 Q1 |
2011-12 Q2 |
2011-12 Q3 |
2011-12 Q4 |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
9 |
Sales |
-3.6 |
5.7 |
5.1 |
12.4 |
-1.8 |
2.7 |
5.5 |
8.6 |
Change in Stock |
89.0 |
-70.6 |
98.5 |
137.8 |
-58.0 |
-47.9 |
282.5 |
-47.3 |
Expenditure, of which |
-2.9 |
4.7 |
5.2 |
15.0 |
-2.9 |
4.5 |
7.5 |
6.8 |
Raw Material |
-3.6 |
4.9 |
6.0 |
18.9 |
-3.5 |
1.2 |
8.5 |
10.4 |
Staff Cost |
3.5 |
7.3 |
2.8 |
4.9 |
3.6 |
5.0 |
4.1 |
1.0 |
Power & Fuel |
11.9 |
0.6 |
4.5 |
9.4 |
10.6 |
-0.2 |
8.0 |
5.1 |
Operating Profits (PBDIT) |
-1.1 |
1.2 |
8.2 |
7.3 |
-4.2 |
-11.1 |
2.9 |
12.6 |
Other Income* |
-47.1 |
43.5 |
-22.9 |
74.2 |
-24.6 |
26.6 |
2.6 |
50.7 |
Depreciation |
1.2 |
2.1 |
3.0 |
7.7 |
-3.1 |
2.1 |
3.6 |
8.5 |
Gross Profits (PBIT) |
-9.2 |
4.9 |
5.7 |
13.5 |
-7.4 |
-10.3 |
2.6 |
20.2 |
Interest |
16.5 |
-1.4 |
5.8 |
20.0 |
-2.3 |
17.9 |
2.7 |
13.6 |
Tax Provision |
-9.6 |
3.5 |
2.8 |
7.3 |
7.0 |
-11.5 |
-4.6 |
15.7 |
Net Profits (PAT) |
-9.9 |
5.6 |
3.8 |
14.1 |
-14.6 |
-16.5 |
-16.7 |
55.4 |
*: Other income excludes extraordinary income/expenditure if reported explicitly
Note: Growth rates are percentage changes in the level for the period under reference over the previous quarter for common set of companies. |
|
II.8 Along with the decline in sales growth,
the stock-in-trade to sales ratio has also declined
in Q4 of 2011-12 (Chart II.2). This decline
points towards a pessimistic corporate outlook
for demand conditions ahead.
High deficits limit fiscal space for reviving
private investment
II.9 The centre’s gross fiscal deficit (GFD)
rose sharply to 5.8 per cent in 2011-12 from 4.9
per cent in 2010-11, with revenue deficit
constituting over three-fourths of GFD as
against 67.5 per cent a year ago. The widening
of revenue deficit in 2011-12 reflected the
impact of the economic slowdown on tax
revenues with the revenue receipts-GDP ratio
in 2011-12 turning out to be lower than even
the crisis years of 2008-09 and 2009-10.
Although the revenue expenditure-GDP ratio
declined in 2011-12, this was at the cost of
development revenue expenditure. Notably,
subsidies increased to 2.5 per cent of GDP. With
the large and growing revenue deficit
constraining the fiscal space for investment
expenditure, the capital outlay to GDP ratio
declined to 1.6 per cent, well below the precrisis
level of over 2 per cent.
Table II.7: Key Fiscal Indicators |
(As per cent to GDP) |
Year |
Primary Deficit |
Revenue Deficit |
Gross Fiscal deficit |
Outstanding Liabilities @ |
1 |
2 |
3 |
4 |
5 |
Centre |
2010-11 |
1.8 |
3.3 |
4.9 |
52.8 |
2011-12 RE |
2.8 |
4.5 |
5.9 |
51.9 |
|
(2.7) |
(4.3) |
(5.8) |
|
2012-13 BE |
1.9 |
3.4 |
5.1 |
- |
States* |
2010-11 |
0.5 |
-0.0 |
2.1 |
23.3 |
2011-12 RE |
0.8 |
-0.1 |
2.3 |
22.3 |
2012-13 BE |
0.6 |
-0.4 |
2.1 |
21.0 |
Combined* |
2010-11 |
2.4 |
3.2 |
6.9 |
65.8 |
2011-12 RE |
3.6 |
4.4 |
8.2 |
65.4 |
2012-13 BE |
2.6 |
3.1 |
7.1 |
- |
RE: Revised Estimates. BE: Budget Estimates.
@: Includes external debt at current exchange rates.
*: Data in respect of States pertains to 26 State Governments.
Note: Figures in parentheses are provisional accounts.
Source: Budget documents of the Central and State Governments. |
II.10 Preliminary data indicates that the
combined revenue and fiscal deficits of the centre
and states as a proportion of GDP increased by
1.2 percentage points and 1.3 percentage points,
respectively, in 2011-12 over the previous year,
with over 80 per cent of the increase contributed
by the centre (Table II.7). Combined
development expenditure-GDP ratio increased
in 2011-12 on account of the states (Table II.8).
Table II.8: Combined Finances of Central and State Governments |
Item |
Per cent to GDP |
2010-11 |
2011-12 (RE) |
2012-13 BE |
1 |
2 |
3 |
4 |
1. Total expenditure |
27.8 |
28.3 |
27.8 |
2. Revenue Expenditure |
23.7 |
24.0 |
23.3 |
3. Capital Expenditure |
4.1 |
4.3 |
4.5 |
Of which: Capital Outlay |
3.7 |
3.7 |
4.1 |
4. Non-Developmental Expenditure |
11.1 |
11.1 |
11.1 |
5. Development expenditure |
16.4 |
16.8 |
16.3 |
6. Revenue Receipts |
20.5 |
19.6 |
20.2 |
i) Tax Revenue (net) |
16.3 |
16.4 |
16.9 |
ii) Non Tax Revenue |
4.2 |
3.2 |
3.4 |
RE: Revised Estimates. BE: Budget Estimates.
Note: Data in respect of States pertains to 26 State Governments. Source: Budget documents of the Central and State Governments. |
Likely overshooting of subsidies pose fiscal
risks during 2012-13
II.11 Achieving fiscal consolidation as
envisaged in the budget for 2012-13 would
hinge on the realisation of budgeted tax
buoyancies and capping of subsidies to below
2 per cent of GDP. The compensation to oil
marketing companies for under-recoveries
budgeted at `400 billion for 2012-13, however,
appears inadequate, given the spillover in
compensation of `385 billion in Q4 of 2011-12
and under-recoveries of `478 billion reported
by oil marketing companies for Q1 of 2012-13,
in spite of some softening of global crude oil
prices. Capping the subsidies within the
budgeted limits would necessitate steps to
allow the pass-through of international crude
oil prices to domestic prices, failing which it
would be difficult to achieve the overall deficit
targets.
II.12 Besides the fiscal slippage on account of
fuel subsidies, moderation in growth from the
assumed 7.6 per cent for 2011-12 in the Union
budget could be another risk factor for revenue
receipts.
II.13 Available data show that during April-
May 2012 key deficits in terms of percentages
to budget estimates improved over the
corresponding period of the previous year
mainly on account of higher tax revenue,
particularly under income and services tax
collections. Direct taxes continued to exhibit
buoyant growth in Q1 of 2012-13, although the
increase partly reflects the lower tax refunds
compared with the previous year. Indirect tax
collections under Union excise and customs
duties during Q1 of 2012-13 shows marked
slippage from budgeted growth.
II.14 Aggregate expenditure growth in the first
two months of 2012-13 was higher than a year
ago, attributable to higher non-plan revenue
expenditure, with interest payments accounting
for over 29 per cent of the increase.
State finances budgeted to improve further
in 2012-13
II.15 In contrast to the centre, the consolidated
revenue account of the states (excluding
Mizoram and Manipur) showed a marginal
surplus in 2011-12 as compared with the
revenue balance in 2010-11. Although there was
an increase in the GFD-GDP ratio, this was used
to fund higher capital outlays. On the revenue
front, despite the economic slowdown, the tax-
GDP ratio of the states increased over the
previous year, aided in large part by higher VAT/
sales tax collections on petroleum products. In
fact, for the first time tax collections of state
governments on petroleum products in 2011-12
were higher than those of the centre. The quality
of expenditure also improved in 2011-12, with
increases in development and social sector
expenditures as well as capital outlay in
proportion to GDP.
II.16 The key deficit indicators of the states are
budgeted to improve further in 2012-13. The
consolidated revenue surplus of the state
governments is budgeted to increase in 2012-13,
mainly on account of an increase in the revenue
receipts-GDP ratio, which is to be supplemented
by reduction in the revenue expenditure-GDP
ratio. The budgeted increase in revenue surplus
would enable a higher capital outlay-GDP ratio
for the states in 2012-13, even while reducing
their consolidated GFD-GDP ratio.
II.17 The majority of the states have budgeted
to meet the targets set by the Thirteenth Finance
Commission (ThFC) for deficit/debt indicating
their commitment to the fiscal consolidation
process. The challenge for the states is to refrain
from sacrificing the quality of fiscal adjustment
in their endeavour to meet the incentivised
quantitative targets.
Need to create fiscal space, spur investment
to revive growth
II.18 Recovery of investment is critical in
reviving growth but depends on fiscal
consolidation and improvement in overall macroeconomic scenario. The major challenges
to growth recovery at the current juncture
emanate from the weak investment demand.
Even a modest recovery in economic growth
during 2012-13 is contingent on the recovery
of investment. However, the capacity of
investment to respond to monetary policy
actions to stimulate growth is conditional on
an improvement in non-monetary factors that
have impacted investment in the current cycle.
On the other hand, persistent inflation, limits
the space for monetary policy to revive growth.
II.19 The slowdown in consumption demand
also points towards the impact of high and
persistent inflation on purchasing power. This
also indicates the need for keeping inflation
under check to maintain consumption demand
at levels consistent with the overall growth objective. Therefore, monetary policy has to
continue to remain guarded against a build-up
of inflationary risks as well as to sustain the
growth potential.
II.20 Given the deterioration in the fiscal
situation, the option of using fiscal policy to
stimulate aggregate demand remains unavailable
unlike in 2008-09 when the previous period of
fiscal consolidation helped to provide the
necessary fiscal space. As higher deficits could
lead to pressures on yields, affecting the already
weak private investment demand, it is critical
to return to a credible and durable fiscal
consolidation path. As such, fiscal space would
need to be created by controlling revenue
expenditure to provide more resources for
capital expenditure which could crowd-in
private investment.
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