Govt. investment hides India's weakening economy

Bangalore: After registering a 5.8 percent growth in the last two successive quarters, Indian economy has outbidden many other countries in the world by expanding to 6.7 percent. Though this is a lower growth compared to the previous fiscals, the current growth rate of India's economy is far better than that of the U.S., Germany and even Japan, who all saw their economies contracting, reported Business Week.

But, economists do not see this growth as the reflection of present market scenario. They say, "India's economic growth has been mostly buoyed by government spending, not by actual private-sector growth." In the last quarter of 2008, for instance, increased government expenditure made up almost all of India's growth, as per the estimates by Singapore-based HSBC (HBC) economist, Robert Prior-Wandesforde. Without the government spending, the growth figure would have been a paltry 0.1 percent.

"If we stripped out the government contribution, then the degree by which India out-performed other nations would be much less significant," says Prior-Wandesforde. To an extent, the trend of increased government spending is worldwide. Both the U.S. and China have announced stimulus packages, which are much bigger than India's $50 billion to $80 billion in new spending and tax cuts. However, as India's economy is still relatively smaller (about $1.1 trillion), the government's role in the economy is much greater as compared to that in the U.S. or China. In most years since 2000, spending by the Indian government has made up more than 10 percent of India's economy, which has recently increased to 13 percent.

During this slowdown, India's deficit has soared since the government has borrowed to pay for the expenses it incurred through several stimulus packages, amounting to 10 percent to 12 percent of the country's GDP, if one includes state-level borrowings, compared with 6 percent to 8 percent in January 2008. Still, the newly elected UPA government has promised to spend money to develop rural India.

"We certainly don't begrudge the government spending this money," says Aninda Mitra, Moody's (MCO) Sovereign Credit Analyst "Given how the global economy has slowed down, one could say that the government spending came at the right time. The key concern is, how does one wind down these expenditures in the future, especially if the rural sector has come to expect this kind of spending."

The Indian government says India's economy may grow as much as 7.5 percent in 2009-2010, and other economists peg the growth potential within one percentage point of that estimate. However, if the private sector growth does not escalate, India would need to worry about one problem: GDP growth figures that grab headlines for the wrong reason.