Emerging markets have had a dream run so far. Their economies have been growing at a much faster pace than that of the developed world. Stock markets have consequently been buoyant and foreign investors have been pouring money into these markets including India by the truckloads.
Infact, in India the rise in stockmarkets has been so steep that valuations of many companies were looking quite expensive. And 2011 has not started off well for stockmarkets either. Investors are realizing that although India presents good growth prospects, there are inherent problems as well. For starters, inflation has simply refused to cool down. To RBI's credit, it began on rate tightening measures quite a while back. But these measures so far have not done their bit in bringing inflation down.
Moreover, India is facing the heat on the commodity front too. For instance, the last fiscal was a good one for India Inc. as profits soared on account of lower commodity prices. But this scenario has now changed. With commodity prices rising, input costs have also begun to rise and Indian corporates are expected to witness margin pressure in medium term. Then there are concerns with respect to crude prices as well. These touched the US$ 100 per barrel mark and have posed a dilemma to the Indian government. On one hand, the government is wary of raising fuel prices back home for fear of stoking an already high inflation. And so it seems more likely that fuel prices will continue to remain subsidized. But that is only likely to put more strain on the government's already stretched finances as the subsidy bill shoots up. This means that it will be a real challenge for the Indian government to meet its targets of bringing the fiscal deficit down by FY13.
Rising incidents of corruption are another reason why one has been seeing volatility in the stockmarkets. The eruption of a plethora of scams and scandals has diverted the government's attention from some good policymaking. No one doubts the huge growth potential that India offers in the longer term. But the government urgently needs to start addressing some long standing concerns if India has to sustain its growth momentum for the years to come.