Q2 GDP growth data underlines deficit-driven nature of economy

Gross domestic product (GDP) in the second quarter of 2012/13 grew 5.3 per cent over the corresponding period last year, driven largely by government spending.

GDP, which is a measure of the level of economic activity , has grown around this level in the first three quarters of the current calendar year, making it likely that 2012 will see the lowest economic growth in a decade.

Besides the slow pace, the quality of growth is bothersome. Sift the data and what comes through is that government spending has played an important part in driving economic growth in the second quarter. Government spending, in turn, has catalysed growth in construction and parts of the services sector, such as banking, trade and hotels.

This pattern of growth does not augur well for the subsequent quarters of the current financial year . The stated objective of Finance Minister P. Chidambaram is to bring down debt-fuelled government spending - the fiscal deficit.

If there are no credible steps to reduce the fiscal deficit, the Reserve Bank of India may postpone a decision to cut interest rates .

A cut in interest rates is, according government economists, the start of a virtuous cycle that will trigger new investment by companies and push up the economic growth rate.

If Chidambaram does manage to rein in the fiscal deficit, the next few quarters may continue to see lacklustre growth.

If he fails to rein in the fiscal deficit, the consumer price index for industrial workers, which averaged 9.8 per cent in the second quarter of 2012/13, may soon be in double digits.

The next few quarters are going to be challenging for India's deficit-driven economy.