26 Years
Home > Business & Investment > The Way Forward...

The Way Forward...

Monday, October 03, 2011

Dr. Arun Singh
is Senior Economist with Dun & Bradstreet India

When the Indian economy entered 2011, factors such as a positive investment outlook, improvement in employment scenario, robust bank credit growth, increasing wage levels and resilient external demand enthused optimism regarding the overall economic activity going forward.

However, as year progressed, the prospects of buoyancy in the growth became weakened increasingly clouded by heightened uncertainty and rising risks as high inflation levels in domestic market, sovereign debt crisis in US & some European countries, uncertainty of global growth prospects, surging international crude oil prices, increasing exchange rate volatility and deceleration in the investment activity increased apprehensions regarding sustainability of India's growth momentum in future. Moreover, the sharp revisions in macro-variables numbers along with volatility in some data sets have been making it increasingly difficult not only to gauge the present scenario but also to estimate future growth prospects.

One of the concerns since the beginning of 2011 has been the sustained and elevated levels of inflation which show no signs of moderation. The rigidities in the supply chain and the changing inflation dynamics which sustained the price pressures had a moderating impact on the growth momentum of the overall economy.

The point of concern is despite the successive policy rate hikes, the transmission of the monetary policy signal has not been fully effective. The renewed surge in the price levels of the food articles as well as the persistence of price pressures in the manufactured non-food inflation is expected to continue during the short to medium term.

Nonetheless, given the slide in the global commodity prices and the aggressive monetary policy tightening being undertaken by the RBI, inflationary pressures are likely to witness gradual moderation towards the end of 2011. The WPI inflation is expected to moderate to around 7% by March-2012 and witness further moderation thereafter.

Nonetheless, high input prices and rising interest rates had dented the corporate profitability and increased the cost of domestic funds. The gross fixed capital formation data under the GDP also underpin the restrained investment activity. Moreover, the growth in the capital goods production data in Index of Industrial Production (IIP) has not only been decelerating, it is also being marked by extreme volatility rendering a certain degree of uncertainty to gauge the investment scenario.

With rising risks and heightened uncertainty about global growth, renewed fear of spillover effect on Indian economy and higher interest rates, capital expenditures are likely to remain subdued during next two-three quarters thereby contributing significantly to the slowdown of Indian economy. 

Along with the restrained investment activity, industrial production numbers have witnessed a decelerating trend. While the IIP numbers were expected to consolidate during 2011 from the high levels witnessed during the initial months of 2010, the sharp fall in the IIP growth numbers since Nov-10 accompanied by increased volatility was unanticipated. Further, demand conditions as reflected by the private consumption expenditure have been on a downward path since the past few quarters.

Moreover, the production numbers of the consumer durable sector have been not quite encouraging. Owing to the moderation in the investment activity and the anticipated moderation in the demand conditions, given the RBI’s efforts to curb the demand pressures in the economy, IIP growth is expected to remain subdued till early-2012. Further, with the expected pause in the monetary tightening by the RBI towards the end of 2011, as inflation starts receding, investment activity is likely to pick up by the beginning of 2012.

Given the waning contribution of the industrial sector to the GDP growth, the robust output in the agriculture and the resilient growth in the services sector had been supporting the GDP growth during the past few quarters. However, in order to sustain the growth momentum in the agriculture sector more aggressive and effective policy reforms are required at this juncture to support and help increase agriculture productivity.

As the growth in services sector tends to follow the industrial growth with some time lag, the moderating pace in the industrial activity is likely to impact the services sector growth going forward. Moreover, a closer look at the components of the services sector reveals that barring the trade, hotels, transport & communication segment, the other two segments has not been growing very strongly. The growth in the community, social & personal services segment which largely consists of the government activity has been decelerating.

Going forward, it is expected to remain subdued given the government's intention for fiscal consolidation. Further, the financing, insurance, real estate & business services segment, which had generally grown by double digits, has been growing below its long term average for the past two quarters. Given the concerns of the growth prospects of the global economy, the prospects of this segment to pick up any further momentum from the current level are not so promising.

Global growth prospects had been deteriorating with the US economy facing a significant downside risk to growth and some countries in Euro region still unable to control the debt crisis. Since these problems are likely to persist, the domestic economy is expected to face some impact, although not so severely, through less favorable external financing environment, trade, business and consumer confidence channels. The deteriorating global economic conditions coupled with the anticipated moderation in the investment and demand conditions, overall GDP is expected to remain subdued during the remaining time period of current fiscal and early next fiscal. 

While India is undoubtedly heading towards economic slowdown as an impact of global turmoil, prompt and flexible policy initiatives and reforms by central government and RBI would help to minimize the impact and arrest the slowdown to some extent.

Facebook   Delicious   Delicious   submit to reddit reddit
No Comments Posted
- Advertising -
City news
NGOs force civic body to nix lease/caretaking of ...
Is Rakesh Maria watching his own officials?
Cops yet to ascertain identity of the actual ...
Dr. Rajan B. Bhonsle, M.D. (Bom)
Consulting Sex Therapist & Counsellor
Dr. (Mrs.) Minnu R. Bhonsle, Ph.D.
Consulting Psychotherapist & Counsellor
Select Sun sign:
Aries (Mar 21 - Apr 20)
Aries (Mar 21 - Apr 20)Meetings and talks will go off very well. Exercise patience and consider all factors before arriving at any decision. An advance payment against a new deal will materialize. Your mate will help you along and will be a source of strength and happiness Make the most of a good day.
Tarot for Love
Select Sun sign:
Aries (Mar 21 - Apr 20)
Aries (Mar 21 - Apr 20)What the cards say: There is new energy. You will benefit Path: Use the energy constructively and cautiously. Don’t rush headlong into disaster Ally: Virgo will calm you down. Avoid Gemini who could confuse you Card for the week: Tarot key no. I The Magician. He gives you the wherewithal to forge ahead. You will achieve and win accolades
- Advertising -
The festive season is back! And it’s time to take
When four artists come together, there’s bound to
Liveaboard’s unique diving trip to the Maldives
Read More