Indian Economy On Recovery Path ALL SMILES!
As India is set to announce overall fiscal 09-10 final performance figures, there is a certain air of expectancy. This is primarily so because these figures would form the pivot on which the economy would grow for the current fiscal. There is an air of expectancy with a strong view favouring India set for a great year ahead. The Reserve Bank of India (RBI) is optimistic about the economy expanding by eight per cent this fiscal, despite tightening of the monetary policy.
“The Indian economy is firmly on the recovery path… the baseline projection of real GDP growth for 2010-11 is placed at eight per cent with an upside bias,” the apex bank said in its April 20 monetary policy statement. GDP growth for FY’10 was seen at 7.2-7.5 per cent. The RBI’s optimism about an eight per cent growth in FY’ 11 is based on the fact that India’s exports have been growing and industrial sector recovery has become more broad-based.
The finance ministry too is quite in sync on the growth figures. A GDP growth rate of last quarter of fiscal 2009-10 will end up exceeding 8.6 per cent and the same is likely to go at upper end of eight per cent in fiscal 2010-11 as economic indicators are turning for better, Chief Economic Advisor to the Finance Ministry, Prof Kaushik Basu, last week told industry body, ASSOCHAM.
The buoyant mood is reflected also in the latest economic outlook by FICCI, which says the Indian economy appears to be in fine fettle. The GDP growth is expected to clock 8.7 per cent in the last quarter of 2009-10 and further improve to 8.9 per cent in the first quarter of the current fiscal (2010-11), leading economists have forecast in FICCI’s Economic Outlook Survey.
The FICCI survey reveals that while the industrial economy is expected to look down, with growth paring from 10 per cent in 2009-10 to 9.2 per cent in 2010-11, the growth in agriculture & allied services and services is forecast to turn in a better performance.
The economists project agriculture and allied services to achieve a negative growth of 0.2 per cent in 2009-10, but this performance is expected improve in the current fiscal to four per cent. The services sector growth is expected to look up from 8.1 per cent to 9.3 per cent during the period.
On inflation, which comes across as an unresolved issue, government would suggest that it has things under control. Prof Basu said that inflation which will remain at double digit for a while would fall below ten per cent within two months or so. He elaborated that inflation, according to the Finance Ministry had peaked up because its core part went up and was likely to stay firm in double digit for close to two months or so and thereafter inch down to single digit.
Although, figures for GDP growth for January-March 2010 are yet to be released, the Finance Ministry feels that last quarter of fiscal 2009-10 would end up clocking a growth rate of over 8.6 per cent since economy is by and large on growth path. Emerging economic indicators to this effect support this projections, felt Prof Basu.
Prof Basu three pronged strategy for India to stay on high growth path by laying mega export thrust, increase share of total trade as percentage of its national GDP as also increase savings rate by making India huff for higher education.
Majority of the participants also
feel that given the comfortable liquidity position in the system, a hike in policy rates by RBI is unlikely to be followed by an immediate hike in interest rates by banks. Even if banks increase the lending rates, corporate would not see much of an impact on their bottom line as other (non-bank sources) of funds could be substituted for bank funding. The RBI marginally increased the reverse rep rate by 0.25 basis points in its April 20 policy statement.
According to the FICCI economy outlook, there is, however, room for cheer on the investment front. There is a consensus amongst economists that investment cycle is gaining strength. They expect more money to be raised through the ECB, FCCB, ADR/GDR route. Companies are also expected to raise sizable resources from the equity market in the current year in view of the trend observed in the latter part of 2009. With sub-PLR lending being discontinued following the introduction of base rate framework, one can expect companies, especially large corporate, to use Corporate Deposits and Commercial Paper route in a larger manner for raising resources.
The economists’ survey also explored the feasibility of the Rs 40,000 crore disinvestments target for 2010-11. Majority view is that this is an ambitious target but is achievable. Meeting this target is contingent upon – alignment of IPO/FPO prices closer to market expectations, initiating a few big ticket issues such as BSNL, MMTC, SAIL, and continued good performance of equity markets. The downside risk to equity market this year is on account of sovereign debt crisis as seen in Greece, tightening of monetary policy by RBI and upward movement in oil prices.
How government can raise additional financial resources in 2010-11. Economists feel that in the current year a robust growth path will automatically help shore up government’s revenues. Cutting down on subsidies and linking prices of oil and oil products to the market were some suggestions that were received from a few economists. Finally, there was a clear agreement amongst all survey respondents that the government should push for quick implementation of the GST regime and the DTC regime as these are expected to generate greater resources for the exchequer.
Exports, which have been a laggard, continued to feature as an attention area. The majority view is that outlook for exports is positive and we can expect exports to clock 15 per cent growth (median forecast) in 2010-11. As Asia now accounts for a sizable part of India’s exports, growth in this region augurs well for our near term export performance. However, recovery in western economies is still fragile with unemployment levels in US, UK and Eurozone still high.
Consumption levels in these markets are still quiet low and with rising oil prices it could get further dented. With sovereign defaults risks looming large and pressure on countries to undertake fiscal correction, how the western markets can provide sizable demand remains a question. In addition to this, movement of the Rupee vis-à-vis the Dollar and Euro would also have a bearing on exports. These are the risks for a sustained pickup in India’s exports going forward.
On the question whether rising capital flows demand some policy action, the FICCI outlook survey said no policy action against capital flows is warranted at this point in time. Capital flows into India are in line with the fundamentals of the economy, particularly the buoyant domestic growth prospects. India’s current account deficit is widening and additional capital flows will offset this. Rising capital flows would even otherwise temper once the developed economies normalise their monetary policy conditions. With an ambitious disinvestments programme on the anvil, it is imperative that the government takes no steps that could hurt sentiment of foreign investors.
FICCI’s Economic Outlook Survey was conducted during the period March 20, 2010 to April 10, 2010. Twelve economists of repute participated in the survey. These economists largely come from the banking and financial sector. The sample however also includes economists from industry and research institutions.
By K Anjna