India may grow fastest but there are problems underneath

While announcing the GDP numbers for Q2, Mr. SC Garg boasted that India would still be the fastest growing economy in the world. While that is true on paper, the claim glosses over a lot of larger problems that could manifest in the coming months. Let us look at two sets of macroeconomic issues that are actually being glossed over today.

Where is the growth

On paper the 7.5% growth looks quite enticing but the question is where the growth is visible? Obviously, there is not much growth happening in agriculture. The services sector is still growing at around 6% with most of the sectoral drivers like banks, financial services and telecom under tremendous financial strain. Manufacturing still remains under overcapacity and limited fresh investments other than in steel. The growth is largely being driven by aggressive government spending on public services and infrastructure.

Dwell on shaky macros

There are a lot of challenges that the Indian economy is facing. To begin with, it is still too vulnerable to the global oil prices. India imports nearly 85% of its daily oil needs and that is the one factor that impacts the trade deficit and the domestic inflation. For the past few months, inflation has been subdued. But, the GDP numbers for the second quarter reveal that low inflation in India is more an outcome of a slowdown in consumption demand rather than price control. That is not a good signal. But the bigger worry is on the government borrowings. India has already crossed the full year fiscal deficit target in the first seven months. We tend to just focus on the Central fiscal deficit which is at around 3.5%. If you add up the state fiscal deficits, the overall deficit is closer to 7%. Government debt at nearly 70% of GDP could be the biggest challenge. It is time to look at the hard reality beneath the GDP numbers!