Slow growth projections may spell good news for Indian economy

In its advance estimates, the government on Thursday pegged India's 2012-13 economic growth at a 10-year low of 5 percent--much lower than its earlier projections--against 6.2 percent in 2011-12. The growth rate is much lower than even apex bank Reserve Bank of India's (RBI) projection of 5.5 percent, released a little over a week ago.

In its mid-year economic analysis, the finance ministry had pegged economic growth at 5.7 to 5.9 percent for the current financial year.

In the first half of the current financial year, the Indian economy had grown at 5.4 percent. This means the economy would expand at a rate less than 5 percent in the second half. According to news reports, a YES Bank analysis pegged growth in the second half at 4.6 percent, while Reuters quoted an official as saying that third-quarter GDP (Gross Domestic Product) growth was likely to be 4.8 percent.

All major sectors posted worse rates of growth than those in 2011-12, except construction which grew 5.9 percent compared to 5.6 percent last year, community, personal and social services which grew 6.8 percent versus last year's 6 percent, and mining which grew 0.4 percent compared to a dip of 0.6 percent last year.

In broad sectoral terms, agriculture and allied services are estimated to grow 1.8 percent in 2012-13 against 3.6 percent in 2011-12, industry--which includes construction--grew 3.12 percent against 3.49 percent, and services 6.58 percent against 8.19 percent.

The Indian economy has been slowing down and the investment climate in the country has been battered by factors like high interest rates, inflation, corruption, a fluctuating currency, and the fiscal profligacy. India also lost the the second-fastest growing major economy status to Indonesia.

While all this may sound like bad news, I see several reasons why such low growth estimates may result in higher economic growth rate for 2013-14, if not for this financial year. For one, these statistics will surely pile pressure on the finance minister, P. Chidambaram, to deliver a more growth-induced Union Budget which is scheduled to be announced later this month. 

Second, the RBI is likely to go in for more rate cuts soon. Yesterday, the RBI governor Duvvuri Subbarao said the central bank will take the lower GDP growth projection into account while framing the next monetary policy. This has raised hopes of another 25 basis points (bps) cut at least in March. This would make loans cheaper and hopefully bring down inflation.

Third, with Lok Sabha (general assembly) elections scheduled for 2014, the government will, in all probability, ensure all its populist schemes such as the Direct Benefits Transfer (DBT) program, and several e-government initiatives will be implemented on time so that the common man can see the benefits of these schemes before they cast their vote next year.

This year, IT spends are bound to rise. According to Gartner, the Indian government is slated to spend INR 368 billion (US$6.9 billion) on IT this year, a 10.5 percent jump from INR 333 billion (US$6.2 billion) in 2012. The estimated expenditure spans internal IT and IT personnel, hardware, software, external IT services, and telecommunications, said a Gartner statement issued earlier this week.

The highest growth segment for government IT spend will be software, Gartner noted. The category will see a growth rate of 18 percent in 2013, led by investments in desktop and infrastructure software.

Another Gartner statement said Indian manufacturers and natural resources companies will spend INR 408 billion (US$7.67 billion) on IT products and services in 2013, up 9 percent over 2012 revenue of INR 374 billion (US$7.03 billion). This forecast includes spending by manufacturers and natural resource companies on internal IT (including personnel), hardware, software, external IT services, and telecommunications.

Similarly, the Indian banking and securities companies will spend 416 billion Indian rupees (US$7.7 billion) on IT products and services this year, an increase of more than 12 percent compared to the 2012 revenue of 370 billion Indian rupees (US$6.88 billion), according to Gartner. This forecast includes spending by financial institutions on internal IT (including personnel), hardware, software, external IT services, and telecommunications.

India's IT industry can expect to indirectly benefit from various government projects. These include the Unique Identification Authority of India (UIDAI), which is the online database of biometric and identification details of residents, the launch of National Optical Fiber Network (NOFN), and the computerization of commercial taxes in local states.

"Despite India's slowing economic growth, manufacturing and natural resources remain large and important sectors in the Indian economy, and they are attracting increased IT spending to improve productivity and competitiveness," said Ken Brant, research director for manufacturing at Gartner. "Indian manufacturers are seeking to use IT to make process improvements and information from across manufacturing operations more transparent and actionable."

Therefore, it won't be long before things begin to look up in India.