BY VMW REPORT
Although, the uncertainity in the shape of the global economic recovery is still persist, however the situation has significantly improved as compare to first quarter of last year. Indian economy is bracing for higher economic growth backed by uninterrupted foreign inflows, eloquent growth in industrial output but the higher inflation and interest rates would also follow.
The acute phase of the financial crisis has passed and the global recovery is underway. Since the announcement of the previous budget amid large fiscal deficit and uncertainties in the Indian Economy, Finance Minister Pranab Mukherjee has announced the growth specific budget for the country. Central government is trying to help states to meet fiscal consolidation by improving tax policy and administration, budget management, rationalization of expenditure and better public financial management. India’s economic growth is vulnerable to the Monsoon as the Agriculture and allied sectors alone contributes almost 18 per cent to the annual GDP of India. Last year’s nasty monsoon has swayed the economic growth. Earlier, the CSO has forecasted the growth of annual GDP at 7.2 per cent in Feb this year. Now, the India’s national income statistics shows the growth of 6.5 per cent, anticipation that the agricultural and allied sectors would suffer a contraction of GDP by 2 per cent, while the Service industry would grow by more than 8.7 per cent. Within the boundaries, the most important issue is price stability i.e. Inflation, specially that arising from supply constraints restricting farm sector output growth. As per the report, advance estimate data shows the food grain production in 2009-10 is likely to be 216.9 million tonne, which is 17.6 mt lower than the last year ‘s production. Sugarcane output too has a shortfall of almost 12 per cent compared to last year, which has led to big gap between demand and domestic production of sugar. India is the largest consumer of sugar in the world and these combined factors would lead to sharp rise in prices of sugar in both domestic and international market. The overall effect of the shortfall in agriculture production would likely to seen on the economic growth by nearly 2 per cent, as the sector accounts for more than 18 per cent of the total GDP.
Source: VMW Analytic Services
In the recent announcement of IIP data, which shows the 16 per cent growth over the last year’s data, supported largely by the strong output of natural gas, iron ore, and other prominent minerals and would continue to see strong output expansion. On the laggard side, output of crude oil and coal has continued to show slackening growth. Construction related cement output has also showed sustained growth around double-digits. As per the general budget 2010, Finance minister has proposed to keep up the up gradation of infrastructure in both rural and urban and have provided Rs173,552 Crores ($38.14 Billion). To provide long-term and sustainable infrastructure growth in the country, Government established India Infrastructure Finance Company Limited (IIFCL), and for that purpose, its disbursement expected to touch Rs9,000 Crore ($1.98 Billion) by the end of Mar, 2010.
Source: VMW Analytic Services
Signs of Recovery
What are the factors, which are showing the signs of recovery is underway in the global economy?
As the acute phase of financial crisis has just over, and global economic recovery is underway, which is fragile and expected to slow in the second half of 2010. However, there are lot of factors which can be determined during the recovery process. The most important points, which getting our attention are:
- Financial markets have stabilized and are recovering but remains weak.
- Interbank lending rates or Call rates in India have declined from a unprecendented 20 per cent to nearly 200 bps and 366 bps in Dollar Rates to almost 15 bps. Interbank rates fell to pre-crisis levels suggesting the ample liquidity in the system which is a good sign for the economy. Even the Indian commercial banking have seen a fall of credit-deposit ratio at 70.3 per cent in Sep 2009 from 74.9 per cent in Sep 2008.
- Major currencies saw a sharp fall against the US Dollar during the financial crisis has now recovered to pre-crisis level.
- International flows to the developing countries such as India, Mexico, China, Brazil and other emerging nations have recovered rapidly during the last months of year 2009. Borrowing cost have also much came down in the developing countries.
- Real economy is also recovered with the world’s largest economies like Japan, Germany, France, Italy and the United States recovered from the deep recession in H2CY2009. Although, the industrial production in Oct last year remained at 5 per cent – below its level as compared to last year. The combine growth of high income and developing countries expanding at 12 per cent.
Most importantly, unemployment situation in the US or Spain is bucking the recovery and expected to stay high for the next couple of years.
Stability in the Financial Markets, But Dangerous Signs Too
As discussed earlier, the global signs of recovery has significant impact over the Indian Economy. World Bank and the International Monetary Fund (IMF) has estimated the GDP growth for FY2010-11 at 8 per cent. Global financial markets have stabilized since the Post-Lehman Brothers incident. The revival of stock markets have supported the fresh issue. As per the latest data, last year Indian companies have raised more than $25 billion largely through equity placement (QIP) since the revival of equity markets. Initial Public Offering (IPO) has also taken place during that time and was successfully listed on the exchanges. Market phenomenon was unprecedented and highly leveraged companies took part in that event as it helps those companies to keep their credit ratings intact.
Source: VMW Analytic Services
Somewhere, Foreign Direct Investments (FDI) yet to show the sign of rebound. FDI has declined by 40 per cent in the developing economies since the first quarter of the year 2008. Despite the recent Dubai World’s decision to standstill its creditors for six months on debt re-payment, and downgrade of credit rating of Greece and Mexico has made no effect to the financial markets and inflows were unaffected. However, the persisting strong inflows will inflate the probability of asset bubble, leaving the countries vulnerable to the sudden stop in external finances. As discussed this probability, the chances are likely to follow-up as the banking and financial sector in the western economies, which is the root cause of the global economic problems, is still fundamentally remains unchanged. Structurally too, changes have been limited. Under these conditions, large increases in bank credit to stressed sectors cannot be expected and the growth in the advanced economies is limited.
Prospect of Interest Rates
As per our calculation based on fact derived from Govt accounts, inflation rate expected to rise steeply both, on supply side and higher food prices. Governments around the are borrowing exceptional amount of money from the market. As shown in the chart, which is depicting the US Budgetary deficit over the period of decade, the US govt will need to finance its recently approved health care bill which will cost more than $1 trillion, and deficit would amount to 10.3 per cent and 8.9 per cent of the total GDP for the year 2010 and 2011 respectively. As per the US Budget Office estimates, debt held by the public would grow from $7.5 trillion (53 per cent of the GDP) in 2011 to $20.3 trillion (90 per cent of GDP) by the year 2020.
Source: VMW Analytic Services
In the domestic economy, Indian Government expected to raise another chunk of debt in the Financial year 2010-11 and it is estimated that the government would raise Rs220,000 Crores. ($48.5 Billion) by issuing government securities. Currently, India’s public debt amount to 75.03 per cent and as per the estimates, debt held by the public would grow to 80.4 per cent by the FY2010-11. Moreover, India’s Fiscal deficit, which is now stood at 10.47 per cent would likely to grow up to 11.81 per cent by the end of FY2010-11. The huge fiscal deficit the large of government borrowing could cripple the supply side inflation and lead sharp rise in interest rates. It is also expected that the Sovereign Credit Rating of India would likely to hurt and will put India on watch list, however no signs of worry is expected, due to sturdy foreign reserve assets, which will protect the country from downgrade of its credit rating.
Prospect of Indian Economy For Year 2010
As discussed earlier about the possibility of high interest rates, large fiscal deficit, high inflation, we still believes that the Indian economy would grow by 8.5 per cent in 2010-11 and nearly 10 per cent in 2011-12 by taking higher agricultural productivity, industrial output and demand for higher exports followed by the revival of global economy in to account. In the FY2010-11, agriculture would contribute by more than 17.6 per cent to the Indian Economy on the expectations of strong output of Rabi Crop. As per the agriculture data, south-west monsoon and fine winters in the north would likely to increase output, which will contribute to the GDP growth.
On the – balance of payment (BoP) front, India’s trade deficit falls short in Oct-Dec 2009 quarter to $30.72 billion as compare to $34.05 billion in same quarter last year led by strong growth in exports by 13.2 per cent over the corresponding year, while the imports registered a growth of 2.6 per cent. Despite the lower trade deficit, India’s current account deficit stands at $12 billion for the third quarter of 2009-10 and $30.3 billion for Apr-Dec of the FY2009-10. India maintains robust Capital Account surplus of $43.2 billion largely supported by Foreign Direct Investments (FDI) and Foreign Institutional Investments (FII), and it is also responsible for the robust building of Foreign Reserve Assets. Substantial current account deficit will not hamper the growth of the country. Perhaps the Current Account (CA) Deficit reflects the country as a net debtor to the world, however for India, which is the emerging economy, may run the CA deficit as it helps India to make itself more productive with the help of foreign inflows and helps it to increase exports in future. Moreover, the recent launch of Indian Depositary Receipts by the second largest foreign bank in India, Standard Chartered Bank will attract the several international players to enter the Indian market which will help India to un-tap its market potential. Listing of further foreign companies would make India a strategic destination for the global multinational corporations. MNCs in India are not only doing business, but they’re seeing Indian entities as a strategic entity for their growth and increasing their visibility and profile in the market.