Review of the Indian Economy
January 12, 2012
2012 begins with a gloomier prospect for the Indian economy than it did in 2011. GDP growth in the first half of the fiscal year fell to 7.5 percent against the budgetary target of 9 percent, and was later revised downward to 8.6 percent (refer table below). Given the economic outlook for the Euro zone and the US, in addition to the business confidence in India (as reflected by low investment activity), GDP growth for the current fiscal year could slip below Prime Minister Dr. Manmohan Singh’s recent projection of 7 percent.
| India GDP Growth Forecast for 2011-12 | ||
|---|---|---|
| Institution | Month | GDP Growth Forecast (2%) |
| Ministry of Finance | February 2011 | 9.0 (Economic Survey) |
| July 2011 | 8.6 (Finance Ministry’s background Note) | |
| Prime Minister’s Economic Advisory Council (PMEAC) | February 2011 | 9.0 |
| July 2011 | 8.2 | |
| September 2011 | 8.0 (RBI Governor Dr C Rangarajan’s personal estimate) | |
| Reserve Bank of India (RBI) | July 2011 | 8.0 |
| September 2011 | 8.0 (with downside risks) | |
| International Monetary Fund (IMF) | June 2011 | 8.2 (2011), 7.8 (2012) |
| September 2011 | 7.8 (2011), 7.5 (2012) | |
| Credit Rating and Information Services of India Limited (CRISIL) | May 2011 | 7.7 to 8.0 |
| October 2011 | 7.6 | |
| Federation of Indian Chambers of Commerce and Industry (FICCI) | July 2011 | 7.9* |
| September 2011 | 7.5 to 8.0 (with significant downside risks) ** | |
| Prime Minister of India*** | January 2012 | 7 |
| Moody’s | January 2012 | Below 7 |
IMF figures are for calendar years.
*FICCI July 2011 Economic Outlook Survey (EOS) with independent economists
**FICCI estimates the GDP growth to be in the lower band of 7.5 % to 8 %
*** The Prime Minister’s speech at the 10th Pravasi Bharatiya Divas 2012 (Overseas Indian Conference) in Jaipur
Sources: Ministry of Finance, PMEAC, RBI, IMF, CRISIL and FICCI
Indian economy in 2011
2011 started on an optimistic note. GDP forecast at the beginning of the year averaged between 8.5-9.0 percent. But the Reserve Bank of India (RBI) was caught off guard with the post-crisis inflation that averaged around 9 percent throughout the year. In response, the RBI lifted interest rates 13 times that resulted in the worst of both worlds: GDP growth slowed with no noticeable effect on inflation.
Economic activity started slowing down from the second half of 2011. Export growth dipped from more than 50 percent in June-July to just 3.9 percent in November. Imports fared slightly better at 24.5 percent for the month of November. Similarly, industrial production contracted by 5.6 percent in October – the first time in 24 months – from around 10 percent through mid-2011. Though it grew by 6.8 percent in November, it is still low by all standards. This broad-based slowdown resulted in low investments and the weakening of domestic demand.
The slowdown was felt in the corporate sector as well. Profit growth for more than 1500 top Indian companies (excluding banks and financial institutions) that were assessed for this update are in the single digits compared to 15 percent in 2010-11. Production of capital goods, which are a measure of business investment intentions, fell by 25.5 percent in October. Fixed investment too fell to 0.6 percent in the third quarter of 2011 from 12 percent in 2010. There is still a fair amount of public investment, especially in roads and other infrastructure. But private investors have held back amid rising costs and uncertainty.
In the financial markets, the Sensex, India’s most widely watched stockmarket index, fell 25 percent in 2011. As a result, net Foreign Institutional Investors (FIIs) outflow from India stood over US$4 billion against an inflow of US$1.35 billion in 2010. The rupee too fell to its all-time low of 54.23 in December, making it worst-performing major Asian currency in 2011.
Indian economy in 2012 and beyond
As we enter 2012, Indian business executives and policy makers are again asking the same question that they did in early 2011: Is the worst behind us?
Predicting where India is headed in 2012 is like throwing darts in a dark room. What we can say at this stage is that inflation could likely drop to a low single digit in the months ahead. This, in turn, could nudge the RBI to cut interest rates to trigger consumer spending and investments, which have remained almost flat in 2011. But in all likelihood, GDP growth in 2012 will still hover around 7 percent.
Equally important is the long-term picture. India still has a large, young, entrepreneurial workforce and has begun to see the benefits of growth and reform. Most experts agree, however, that economic activity will weaken without the much-needed “second generation of economic reforms.” The policy paralysis in the government has already resulted in a downward revision of India’s GDP forecast for 2015 through 2020 from 8 percent to 7.5 percent. While these forecasts still offer a positive story, India is slowly realizing that 9-10 percent growth will remain an ambitious target unless it gets its house in order to sustain high GDP growth rates.