India's growth for FY11 has been healthy at 8.7%. But can it replicate this strong growth going forward as well? Not really, according to credit rating agency Fitch. The latter expects India's growth to slow down to 8.3% in FY12 and to 8% for FY13.
After being hit hard in FY09 on account of the global financial crisis, the country recovered well to post a healthy growth in FY10. This growth only accelerated in FY11. However, while growth continued to impress, the country has been impacted by rising inflation which has remained at high levels for quite some time now and has still not eased within the comfort levels of the RBI.
High food prices have been the main culprit and although monsoons were decent last year, they were not enough to bring food prices down. This was largely due to inadequate infrastructure as foodgrains were left rotting due to poor storage facilities.
The RBI in a bid to contain inflation has already raised interest rates 8 times in the last 12 months and is expected to continue with its rate tightening measures till such time that inflation cools off. Therefore, with interest rates rising, most companies are likely to see a rise in interest costs which is expected to dampen profitability. Corporates have also been hit on the raw material front. Rising commodity prices have led to an increase in input costs which have put pressure on operating margins and hence profits as a whole.
Which is why growth in GDP is expected to slowdown going forward. Despite this, the country's prospects look better than that of the developed world which is struggling to recover from recession. Turning on the printing presses has also not done much in terms of reviving their fortunes. And more quantitative easing is only straining the finances of an already overstretched government. Thus, near to medium term pressures in the form of inflation notwithstanding, India still remains an attractive bet in the longer term.