Currently the most worrying aspect is that while India's economy was cushioned from the 2008 global crisis by the strong dose of fiscal and monetary stimulus, this time around there is no headroom to provide any fiscal or monetary stimulus, says Dr. Arun Singh, Senior Economist, Dun & Bradstreet India
The year 2011 was marked by a phase of high inflationary pressures, the consequent increase in interest rate in the domestic economy, rising uncertainty on the global growth front, increased crude oil prices and the deteriorating business confidence and consumer sentiments. The persistence of high inflation in the domestic economy, at a time when India was on the verge of achieving its pre-crisis growth levels, emerged as the key area of concern for the common man and the government authorities alike. The sources of price pressures which shifted from food articles to primary non-food articles and then manufactured non-food products had accentuated the pressure of managing inflation by the Government and the RBI.
The prospect of buoyancy in the growth of the Indian economy which was expected during the beginning of the year began to fade by the middle of the year and currently remains clouded by heightened uncertainty. The ongoing state of events such as sovereign debt crisis in the euro region, weak economic activity in the US, sustained political unrest in the MENA region, the massive earth quake in Japan and rising interest rates in China continued to afflict the global and domestic economy. The deteriorating sentiment – both domestic as well as global investors - was reflected in the slump in the domestic stock markets, significant fall in FII inflows as compared to the record inflows during the past year, the rising current account deficit and the sharp depreciation of rupee.
The increase in volatility in the financial markets as well as the domestic economic data sets released during the year gradually increased concerns on sustainability of India's growth momentum.
However, with 2011 mostly behind us, the performance of the Indian economy in some sense has been weaker than expected primarily owing to the high inflation, the significant hardening of interest rates, slump in investment, and lack of policy reforms for a substantially long period and deteriorating consumer and business sentiment. Further, the slowdown in the government demand, given the lower budgeted expenditure of the government during FY12 to adhere to its fiscal consolidation agenda, was not backed by the much required private investment demand to support growth. Moreover, the government finances remained strained during the year owing to a rising subsidy bill (fuel, food) and lower revenue receipts (owing to moderation in the domestic growth).
Thus, currently the most worrying aspect is that while India's economy was cushioned from the 2008 global crisis by the strong dose of fiscal and monetary stimulus, this time around there is no headroom to provide any stimulus-fiscal and monetary.
Real GDP is expected to grow at 7.3% during 2012
The deceleration in economic performance during 2011 has been on the back of the poor performance of industrial production, while the agricultural and the services sector have remained resilient so far. Slowdown in the manufacturing output along with the significant lower output in the mining sector which posted a decline for three consecutive months had impacted the industrial production activity severely. Given the slowdown in the industrial activity, weak investment demand along with moderating private demand conditions, deteriorating sentiment coupled with the prevailing turmoil in the global economy, D&B expects GDP to average at around 7.3% during 2011, sharply lower than the growth levels achieved during the previous year. Going ahead, the pace of economic activity is expected to recover during second half of 2012 owing to the abatement in the inflationary pressures, the consequent easing of interest rates and some revival in the investment activity.
Nonetheless, the growth momentum is expected to remain subdued during 2012, with GDP expected to average at around 7.3% given moderation in the services sector and uncertainty in the global economic environment.
Disaggregating the growth data on a sectoral basis, D&B expects the subdued industrial output and moderation in the services sector to restrain the overall GDP growth.
Given the dismal demand conditions - investment, private consumption as well as external demand, D&B expects the industrial component of the GDP to register a low growth of 4.3% during 2011.Industrial activity is however, expected to gain traction during 2012 and grow by around 6.0% driven by the resumption in the investment activity as the RBI is likely to bring down the interest rates.
D&B expects services sector to grow by around 9.4% during 2011 and moderate to 8.9% during 2012. The deceleration in industrial production is expected to spill over to the service sector during the subsequent year. Further, worsening of investor confidence, especially internationally, as the global economy continues to remain clouded with uncertainty would pull the growth in the overall services sector.
Private Final Consumption Expenditure (PFCE)
The PFCE which remained buoyant in the beginning of 2011 witnessed a gradual moderation as the year passed by. After growing by 8.0% during Jan-Mar 2011, PFCE moderated considerably during the following months, recording an average growth of 6.1% during Apr- Sept 2011, and is expected to remain at 6.3% during 2011. The sustained rise in the prices and high interest rate regime coupled with the prevailing uncertainty primarily owing to the developments in the Euro region and the US has dampened the demand conditions. Going ahead, we expect the demand conditions to remain muted during 2012 as well and PFCE to average at around 6.3%.
Investment and Saving Rate to remain muted
On account of deferred capital expenditure plans by Corporates owing to high interest rates, elevated input prices, lack of clarity on various regulatory and policy issues and uncertainty of implementation of reforms, the investment rate is likely to remain subdued at 34.6% during FY12. D&B expects the investment rate to witness a slight up tick and average at around 35.5 % during FY13 as easing of borrowing costs would provide some respite. D&B expects the domestic savings rate to remain muted at 31.0 % during FY12 and increase slightly to 32.0 % by FY13. Lower corporate profitability, fall in household income and rise in fiscal deficit owing to the increasing subsidy bill on one hand and lower revenue receipts on the other is likely to dampen the domestic savings rate going ahead.
WPI Inflation is expected to average at 5.9 %
The WPI inflation remained above 9.0% during 2011. The relentless rise in the global crude oil as well as gold prices, firm international raw material prices, the domestic supply side bottlenecks coupled with the demand side pressures had led to persistence of high inflation in the domestic economy. D&B expects the WPI inflation to remain high and average at 9.5% during 2011. However, WPI Inflation is expected to abate and average at around 5.9% during 2012 as the significant tightening of monetary policy and the moderation in the demand conditions coupled with impact of some of the measures taken by the Government to contain food price inflation is going to aid in arresting the inflationary pressures.
Moderation in the commodity prices in international markets also expected to provide some respite to the domestic inflation.
5 year G-sec yield could ease…
Tight liquidity conditions in the monetary system owing to additional government borrowing, lower deposit mobilisation coupled with hardening of interest rates by the RBI has led the yields to inch up higher in the domestic gilts market especially, during the latter part of 2011. D&B expects the 5 year G-sec yield to remain at around 8.5% by end 2011 and ease slightly to 8.2% during end 2012. Moderation in the headline inflation coupled with likely cut in interest rates during second half of 2012 is expected to provide some respite to the yields during the forthcoming year.
Rupee is expected to appreciate during 2012
Outflow of foreign funds, dollar demand by the importers owing to the rising prices of global crude oil and gold coupled with strengthening of dollar as investor’s turned toward investments in dollar denominated assets following the protracted debt crisis in some countries of the European Union have led to a sharp depreciation of rupee towards the second half of 2011. D&B expects the rupee to remain under pressure till March 2012. The rupee, however, is expected to appreciate to Rs 48.5 per US$ by end 2012 as the domestic economy gathers momentum leading to FII inflows.
Given the muted demand conditions in the domestic economy and the ongoing crisis in the global economy, D&B expects the imports to register a growth rate of 27.5% and exports to grow by 34.2% during 2011. Given the slowdown in the domestic economic growth and further deterioration in the economic conditions in the US and Euro region going forward, D&B expects the imports to witness significant moderation, registering a single digit growth of 9.6% and exports to decline by 5.0% during 2012.
Going ahead, the pace of economic activity is expected to recover during second half of 2012 owing to the abatement in the inflationary pressures, the consequent easing of interest rates and some revival in the investment activity. Nonetheless, the growth momentum is expected to remain subdued during 2012, with GDP expected to average at around 7.3% given moderation in the services sector and uncertainty in the global economic environment.