Mar 15, 2012|
Economic Survey: Trying times ahead
The Economic Survey for 2011-12 (FY12) was tabled in the Parliament today. It highlighted the progress made by the Indian economy in FY12 and some big challenges it faces in the future. Let us have a look at the key takeaways from the same.
Slowest growth in nine years
FY12 was a challenging year for the government and the central bank (Reserve Bank Of India, (RBI)) as they tried to manage growth and price stability. According to the Survey, the Indian economy is estimated to grow by 6.9% in FY12. This has to be viewed in context of the fact that growth was robust at 8.4% in each of the two preceding years. Not just that, the rate of growth was also lower than what was recorded in the period 2003-11 (barring 2008-09 which was when the global crisis was at its peak). While agriculture and services did reasonably well, it was the deceleration in industrial activity that dragged down growth for the overall economy. The manufacturing sector grew by 2.7% and 0.4% in the second and third quarters of 2011-12.
The 6.9% growth projection is lower than the 9% growth projected for FY12 by the Economic Survey 2010-11. That optimistic number at that time meant that Indian economy would most likely revert back to the pre-crisis levels of the three year period 2005-08. The buoyancy was based on robust growth in the preceding two years rise in savings and investment rates.
But the Eurozone crisis and rising international crude oil prices changed all that. Further, there was pressure of politics, which also resulted in slowdown in key reforms to be implemented. What made the scenario even more challenging was that inflation remained high for a larger part of the year although there were signs of it cooling off towards the end. The Survey states that monetary policy was tightened by the RBI during the year to control inflation and curb inflationary expectations. The slowing inflation towards the end of the year reflects the lagged impact of actions taken by the RBI and the government.
Short and medium term prospects
The Survey has projected that the Indian economy will grow by 7.6% in the next year (FY13). The main reason for the recovery to be initially slow is the slight decline in investment rate. In the third quarter of 2011-12, gross fixed capital formation as a ratio of GDP was 30%, down from 32.3% one year ago. But as fiscal consolidation gets back on track, savings and capital formation should begin to rise.
Moreover, the Survey states that with the easing of inflationary pressures in the coming months, there could be a reduction in interest rates by the RBI. This would encourage investment activity that could have a positive impact on growth. Thus, the Survey expects economic growth to pick up thereafter and reach 8.6% in FY14.
Not surprisingly, there is a caveat to this. The Survey suggests states that since projections are based on assumptions regarding factors like normal monsoons, reasonably stable oil prices and global growth, a deviation from these situations will certainly impact India's growth. But it remains optimistic that owing to 15 years of robust growth and nearly a decade of over 30% investment rate, the Indian economy can be the leading engine of global growth.
The key here is fiscal consolidation. The Survey states that the 2008-9 downturn came to India when the country's fiscal balances were robust. Hence, there was ample scope for fiscal and monetary stimulus. With this second slowdown coming so quickly on the heels of the previous one the scope in terms of fiscal and monetary policy is much more limited. What this means is that the government will have to be more innovative in terms of policy making.
We believe that while conditions in the developed economies could be subdued in the coming year, it all boils down to how proactive the government gets in bolstering India's growth. The RBI has already done its bit in bringing down inflation by raising rates. But it is now up to the government to complement these efforts by reducing its wasteful expenditure. Reforms will be the key here. Only then can India hope to achieve consistent growth of 9% going forward.
||Radhika Pandit (Research Analyst), Managing Editor, ValuePro is one of our most senior analysts with nearly a decade-long stint in the field of equity research. She has helped build our pharmaceutical sector research from scratch and has a firm grasp of the Indian automobile industry. Being an ardent follower of Warren Buffett's value investing philosophy, she believes in investing in solid businesses for the long haul.
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