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Is 8% GDP growth elusive to India?
Wed, 29 Feb Pre-Open

In order to curb the inflation monster Reserve Bank Of India (RBI) adopted a hawkish monetary policy since the last two years. Tight monetary policy hurt the industrial capex cycle of corporates which in turn impacted the overall economic output. Rate sensitive's like construction, engineering and auto were so badly affected by rising interest rates that the growth figure of 8% seemed elusive. In fact, if the poll of 26 economists materializes (growth expectation of 6.4% in quarter ending December 2011) than this would be the fourth straight quarter below 8%. Thus, interest rates have been effectively labeled as the main culprit for slowdown in overall growth.

However, apart from interest rates confidence crisis resulting from policy bottlenecks is also hurting growth equally. Although there are indications that the rate cycle has peaked out the kind of macro-headwinds India is facing it would take a while before we scale/surpass historical growth figures.

Exports are under significant pressure due to the ongoing trouble in the developed markets. Government expenditure (important component of GDP growth) too is likely to be curtailed as revenues (tax receipts) are dwindling due to the impending slowdown. Although borrowing is an available option to the fund the required expenditure it may crowd out private investments. So, government needs to be careful in that regards. Another factor impacting growth is investment which as mentioned previously is suffering due to the rising rates. However, consumption (typically the largest component) continues to remain the key growth driver.

Nonetheless, right now the other factors (exports, government spending and investments) are weighing down the consumption component. This in turn has impacted the GDP growth figures. We believe that policy issues and interest rates will play a key role if India aims to surpass the 8% figure and achieve double digit growth in future. And for that RBI and Government will have to work in conjunction. RBI will have to balance growth and inflation aspirations prudently. On the other hand government will have to take steps in ironing out bureaucratic bottlenecks thereby creating a healthy investment climate.

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