The year 2012 was the year the Indian economy stalled. The reasons were diverse and manifold, with home-made problems going in tandem with factors beyond the country’s control.
Firstly, export-oriented sectors had to face the slowdown in the US and the debt crisis in Europe, two major markets for its goods and services. The capital goods industry in particular suffered a blow, causing a chain reaction of stalling investments and a fall in consumer sentiment. Things became worse when the Reserve Bank of India (RBI) decided to keep interest rates high in an attempt to curb inflation and keep borrowing under control, and severely suppressed investment activity.
We are happy about the weak rupee, although I
know it is not good for India’s economy. But I
trust the government that it will become better in 2013. Overall, it’s not that bad.
The slow pace of economic reforms — with foreign investment regulations and fiscal measures such as retrospective taxation — also put the brake on economic growth.
The result was that the government had to scale down growth projection for the current fiscal year — which ends in March — to 5.7-5.9 per cent from the previous estimate of 7.6 per cent, which is dramatic for a country that had near double-digit percentage growth rates just a few years ago when India’s economy was firing on all cylinders.
However, if the government gets a grip on reforms and eases its monetary policy as expected, India’s economy could return to the 9 per cent growth needed to combat poverty, World Bank chief economist Kaushik Basu said in a CNBC interview last month.
“India can still expect 9 per cent growth in the long run,” Basu said.
“This scenario, if the economy manages a slow pickup, which is what I think will happen in India, is really good enough whereby the country is more or less ready for a faster pickup after two years when the world economy begins to improve,” he added. “The fact that growth went down to 6.4 per cent in 2011 and growth forecasts for this year are even lower really does not change the long-term view.”
Economists expect the recovery to begin in the first quarter of 2013, provided the RBI agrees to an interest rate cut at its meeting this month and is able to keep inflation under the critical rate of 7 per cent, which is both supportive to sustain investor confidence and improve consumer sentiment.
Other reforms should also support growth. Measures include allowing foreign direct investment in multi-brand retail, aviation and broadcasting, hiking the diesel price, capping the number of subsidised liquefied petroleum gas (LPG) cylinders, opening up the pension sector to foreign investment and raising the foreign direct investment cap in insurance to 49 per cent.
According to a forecast by the RBI presented to the Indian parliament on December 17, headline inflation at the end of March is expected to moderate to 6.8-7 per cent from the current 7.45 per cent.
Financial advisory and research firm Nomura India’s chief economist Sonal Varma says in a research note obtained by GN Focus that she expects a total of 50 basis points in rate cuts over the first half of this year, starting with a 25 basis point cut at the January meeting. Over the whole fiscal year, the rate cut is expected to reach 125 basis points.
“This should keep headline and core inflation in check,” says Varma.
One big concern remaining is the current trade deficit. Although it narrowed to $19.3 billion (Dh70.87 billion) in November from $21 billion in October, the government says it was up from the $15.8 billion reported in November 2011, adding that it will now launch a stimulus package to boost trade that includes a tax waiver on some capital goods and a reduced interest rate on loans for certain exporters.
The package aims to increase exports by about 20 per cent to $360 billion in the current fiscal year.
“Much will depend on global factors, especially the developments in the US and the Eurozone,” says Varma.
She adds that foreign equity and debt flows need to be strong enough to bridge the trade deficit. If not, the rupee could once again come under pressure.
The depreciation of the rupee has been another great concern for the government in the past. The rupee weakened by 16 per cent in 2011 and continued to drop, albeit slower, in 2012 — by 2.6 per cent against the US dollar. What benefits non-resident Indians who earn their living in strong foreign currencies has severely increased the price of imports, especially of petroleum products, for India and boosted living costs in general.
“We are happy about the weak rupee, although I know it is not good for India’s economy,” says Robert Gulati, an Indian expat who runs Raja’s Fashion, one of the top Indian tailor shops on Bangkok’s main business artery Sukhumvit Road.
“We are able to buy fabrics from India for much lower prices. However, I’ve also seen less Indian tourists coming over to Thailand in the past months, which has certainly been due to the economic difficulties,” he tells GN Focus.
“But I trust the government that it will become better in 2013. Overall, it’s not that bad. China has problems, Europe has them and [so does] the US — we had far less customers from these regions recently,” he adds.
India remains Asia’s third-largest economy behind China and Japan and the tenth-largest in the world. Many sectors are still very well-off, such as the textile industry and the services sector, in particular IT and business process outsourcing, benefiting from increased outsourcing by Western companies.
According to the monthly report by India’s Ministry of Commerce and Industry, released last November, India’s core industries — coal, crude oil, refinery products, cement, natural gas, fertiliser, steel and electricity — grew at an eight-month high of 6.5 per cent in October against 0.4 per cent in the same period in 2011. This helps balance the problems in the capital goods sector, which has been showing consistent contraction, as its fortunes depend on capital expenditure.
The international business community has shown even more confidence. Influential US investment bank Goldman Sachs on November 29 raised India to “overweight” from “market-weight”, citing growth recovery and inflation moderation ahead in its report.
“Reform initiatives and changes in government leadership this autumn have created a sense of optimism among the domestic investor base for the first time in over a year, and the risk of policy missteps in 2013 has been lowered,” the report says.
Financial services firm Morgan Stanley took the same line and expects a growth rate of 6.1 per cent in 2013, driven by positive impact from policy actions and acceleration in output growth in a “gradual recovery”, the bankers wrote in a report released in November.
The greatest fear of all, a downgrade of India’s debt rating to “junk”, which was on the table in 2011, seems to have vanished as India continues with its reform agenda.
“While the economy remains vulnerable to external shocks and domestic political turbulence, incentives are in place for the authorities to respond with investment-friendly reforms, a dynamic already under way,” say Deutsche Bank economists Taimur Baig and Kaushik Das in a report published on December 4.
India is likely to “face less pressure in 2013 and get more breathing space”, the economists conclude.
Charting economic growth
Before the global financial crisis, India’s economy flourished at almost double-digit figures. The period from 2003 to 2008 saw growth rates around 9 per cent and sometimes in excess of
9 per cent.
Slower growth came with the global economic downturn, which put pressure on exports and the rupee, with the slowdown sharpening in 2011 and growth dipping below
7 per cent.
Government measures and supportive fiscal policies such as rate cuts are now aiming to get India’s growth back on track to reach its former strength.