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Indian Economy 2011: Economic Expansion Would Be Fragile But It Is Expected That Growth Would Be Inclusive & Sustainable

RBI head office, Delhi

Global economies are broadening from the economic downturn since year 2009 and still continues, although the growth is categorically fragile and needs to be proctor by the government until the shift in Business Cycle. Withal, VMW sees a lame foreign policy towards Pakistan would be a troublesome for India in the long run.

Key Stats for India
Overspending : 2.91%
Inflation : 8.90%
Trade Deficit : $23.1 billion
Industrial Production : 13.76%
Equity Returns (YTD) : 16.85%

Major Forewarn

  • To ensure basic education to all. Education is still a major challenge and India should expand their budget towards the education and to make sure to provide at least basic education (high school) to all. VMW believes, expansion of education budget is extremely important for India to sustain at a level of higher economic growth and to supply quality human resource for the next generation.
  • Heavy investments in Social Infrastructure. Since Indian government has already committed to invest up to $1 trillion in infrastructure, however the pace of development is very slow in proportion to the economic growth. Asia’s third largest economy is attracting billions of dollars in terms of portfolio investments and foreign direct investments and transforming itself as a best investment and market destination for the investors but to keep up the momentum, infrastructure development needs to step up moderately.
  • Invest in Entrepreneurism: Make India as a source of new innovation to lead the next generation. Indian government should start focus on the entrepreneurism to give people a platform to exhibit their bright ideas which enables to transform their ideas into the potential corporation.

Good times are, seemingly, ahead with the sustainable growth  amid persisting higher inflation, appreciation of currency against the US Dollar, trade gap and ameliorating tax policy. On the above key stats,overspending or fiscal deficit for the fiscal year 2010-11 at 2.91 per cent of the total GDP till Jun, 2010 and VMW estimated total fiscal deficit at 3.9 per cent. It is indeed lower than the budgeted estimates – largely supported by the auction of 3rd generation mobile technology spectrum, which yields the Indian Government about $22 billion. Apparently, fiscal deficit (was a preliminary problem) is not a cause of concern since the government is sitting on an ample amount of cash and could expand their spending on a much-needed social infrastructure such as Unique Identification or UID system for the Indian citizens to get them eligible for the several government schemes (prevailingly benefited for the lower-income group people). Most importantly, however,  on the other side, India’s geo-political relations would be nagger, which the VMW is seriously cogitating and seeing it as one of the major challenge for India going forward. Pakistan, indubitably, is the major challenge for India to handle the fragile relations with the western border sharing country. Since 2008 Mumbai Attacks, relations between both countries has strained and needs an urgent resolution to abate the rising threat of unamicable situation between the nuclear holders and it could disrupt the trade as well as diplomatic relations.India as a “state” is a competitive economy and a representative political system. The recent most sensitive judgment on Ayodhya‘s Disputed Land lawsuit filed by the several parties for the title of land ownership has proved India’s efficiency towards the system of justice, socio-economic, sustainable security, stability in politics via quality leadership and signaling further strong civilization in the country, which is extremely important for an economy which is attracting investments round the world.


Debate Over Quantitative Easing 2 (QE2)

Economic challenges for the United States might be prodigious, however the recent policies should not be a solution for the US to re-emerge from the painful unemployment situation in the country. The overstated tone of the US President in the past few months have sparked a thought of “Protectionism“. US, which is always known for its dynamic economy, biggest corporations and avant-garde entrepreneurs is now becomes a propagandist towards the protectionism. Indeed, the United States is a pillar of the global economy but there is an urgent need of consistent government policies to promote trade, tax holiday to the smaller companies to improve employment opportunity and pacified business financing for smoother function of business. For that purpose, central bank’s involvement in every government policy is desperately needed. In India, central bank, Reserve Bank of India have revised interest rates to curb rising inflation but the inflation is not a concern for the industrialized economies and there is an urgent need of expansion of money supply since there is no room for further rate cut as the central banks running on the Zero Interest Rate Policy (ZIRP).

The recent controversial move by the US Central Bank, Federal Reserve to expand the country’s money supply by purchasing treasury bonds worth $600 billion have sparked the debate and facing dissent from the emerging nations like China, Brazil and the advanced nations like France and Germany, however the Fed’s move is absolutely best in the US’ interest and it should be keep in mind that the stability in the US economy is absolutely necessary for the global economic growth. Although, it might be a problem for the emerging nations since they’re worrying about their economy being flooded with the fresh hot money, however this could be a solution for a continous stable recovery. Japan, the world’s third largest economy, which is fighting against the sharp rise in Yen (ISO 4217 Code: JPY) and Deflation, its central bank, Bank of Japan too has cut rates to around zero. Bank of Japan also committed to buy $60 billion worth of Japanese securities, which is clearly giving the signal of infusion of fresh money into the system, which is a bolster for the Japan’s ailing economy.

Data Source: VMW Analytic Services

India Economy 2011 Prospect With Global Economy In Contrast!

India has never faced as worst situation as the western economies have faced. It was just an experience of slower export, bad liquidity condition which hampered the developing economy to keep on the spectacular growth. Now, Indian economy is prospering with its own sturdy domestic demand amid high level of poverty. Corruption is still a matter of concern and mismanagement at the organization is also a crucial part which is impacting the sustained economic growth. India’s accounts reporting system is letting tens of thousands of companies evading tax. According to the VMW Research, India’s tax department is losing almost $11 billion in terms of tax revenue every year and unorganized sector is the major contributor to the tax evasion. Despite of recent developments in the last 15 years, when the Indian taxation system has undergone tremendous reforms, but lack of transparency in the tax policy is still leading to the higher loss of tax revenue, which should be meliorate with the moderate tax policies. The recent debate over the implementation of Direct Tax Code or DTC from FY2012-13 would improve the tax laws and simplifies it further. India still has a long way to bring taxation reforms in order to prop-up tax revenue to cut the fiscal deficit because, year 2010 cannot be repeated again and again, where the government was able to raise hunky amount of cash through the sale of 3rd generation mobile technology to the mobile operators and most importantly, India was able to cut its overspending (fiscal deficit).

Liquidity Update: Stock of Money, Inflation and Overnight Lending Rates. India needs long term foreign investment inflows.

Inflation in India is one of the principal subject for the policy makers. Even inflation at eight per cent – RBI is at sixes and sevens to fix the price crisis amid disquietude for the stable and target of double-digit growth rate for the economy. While the food price inflation is over 16 per cent and the wholesale price inflation is over eight per cent, it makes a fuss since both benchmarks are passe and needs to be reconstructed or revamped with newer commodities. Government officials says, food prices will come down in the next few months, but is there any hope for the same? Food prices are rising, thanks to the watchword of fastest growing economy, since the domestic demand is rising without pause (and would continue to rise) and at the same time, supply would not be able to conform to the rising demand. The rise in food prices are realistic and could not seem to be pacify in the next few months, however the good monsoon this year might be a solution for the rising food prices, though the RBI’s monetary policy has different facet. RBI is fixing the inflation problem by tightening the money supply and demand side problem (food price inflation index) cannot be fixed straightaway. Consequently, going forward, inflation would continue to be problematic for the central bank as it is not expected that the inflation would come down to below five per cent in the next couple of months due to volatility in commodity prices and strong local demand. RBI’s policy stance would be inflation hawk but it is not certainly pointing towards the consistent rise in interest rates. There are other several measures, which are available with the central bank and it is expected that the RBI would target the foreign inflows to certain extent to contain the swift appreciation in Indian Rupee (ISO 4217 Code: INR) or sell enormous amount of Indian currency to impede  further wild appreciation against the US Dollar (ISO 4217 Code: USD).

On the monetary situation, RBI, since Oct-2009, revising interest rates to ensure that the excess liquidity in the market would not be use in a risky assets since the economic recovery is too fragile. RBI has revised its policy rates by more than 300 bps and room for further tightening is still available with the RBI. It is now clearly visible that the commercial banks have started borrowing from the RBI’s repo window and many of them have revised their lending rates and deposit rates to keep up their capital adequacy ratio and sufficient liquidity for a proper credit growth for the sustainable economic growth.

Data Source & Projection: VMW Analytic Services

Indian Economy so far has vastly exceeded expectations. Perhaps, the shining growth would continue. apparently, VMW has revised the GDP growth estimates at 10 per cent for the fiscal year 2012 and maintaining this growth rate. India could see the double-digit growth rate(refer to the above figure of GDP over the past 60 years) backed by the immense foreign inflows, unabating rising domestic demand, boosting agricultural output, government’s bolster for the infrastructure development will spur the economic growth and employment opportunities further for the next five years and it is certain that India would grow at double-digit growth rate. For this fiscal year 2010-11, according to the government authorities, Indian economy is expected to grow at 8.5 per cent and 9 per cent for the next fiscal. On the other side, Current Account of the Balance of Payment (BoP) is expected to be at -2.7 per cent of the total GDP for this fiscal and to expand further by 0.2 per cent to -2.9 per cent for fiscal 2011-12. India’s merchandise trade deficit would hard hit due to local currency appreciation, anticipation of higher crude imports and non-crude oil imports and VMW expects, Rupee will appreciate to INR42 for a US Dollar. In this situation, RBI would intervene into the foreign exchange market (since INR is a managed float type of currency) to curb appreciation and maintain uniformity.

Since the Agriculture & Allied sector is one of the most significant part of the Indian Economy, dependency on monsoon is also higher. This year had a better than anticipated rainfall in the prominent parts of the country and kharif crop will see a strong output this year along with the signification availability of resources for the rabi crops, which will improve the farm sector growth by at least 4 per cent and it will improve the overall economic outlook for the next fiscal too. On the country’s industrial growth, service export, which accounts for 5.8 per cent of the India’s GDP, will continue to be sluggish since the major export customers of the Indian IT Services are the United States and Western Europe, which are still fighting for the “sustainable foundation” of economy. Mining sector on the other side has a robust growth in the past few quarters and still progressing with higher growth prospect due to oil & gas activity, while growth registered by the manufacturing sector largely driven by the domestic demand.

Capital Inflows, Financial Market & Overall Economic Outlook

2010 2011 2012
Real GDP Growth 9.70% 8.40% 10%
Consumer Prices 8.60% 5.70% 5.50%
Current Account -3.1% -3.1% -2.3%

So far, year 2010 has attracted over $21 billion in terms of Portfolio Investments in the Indian equity markets and over $15 billion have been raised through the initial public offerings. Since the foreign investors pouring billions of dollars in emerging markets to earn good amount returns over their investments. Right now, equity is one of the most favorable investment option, since it is giving the handsome returns in a short span of time. As the US central bank, Federal Reserve is planning to buy $500 billion worth of bonds, this would further expand the kitty of the investors, which will come into the capital market. Furthermore, the corporate earnings, more or less, are better than expectations and supporting the anticipated rally in the equity markets. India will see the further inbound foreign direct investments – would able to attract over $90 billion of capital inflows, which will be use to finance to abate the current account deficit to certain extent, thus India has no, but at least slight, problem as far as the macro economy is concerned. The major tussle is inflationary pressure on the Indian economy, which is a  rowdy challenge and currently reading at two times of the comfort levels (set by RBI). VMW expects, that the inflation would continue to put RBI on its toe and further tightening of liquidity is expected over the next couple of quarters. More importantly, going forward, RBI would consider to curb foreign inflows into the country to prevent heating-up of the economy, since India is the best investment option from the global investments perspective.

Per the observation, global economy would continue to recover, though it would be flimsy, however the world economies are set to see a major change in business cycle from the year 2012 and global economies would expand at a rapid pace with strong fundamentals framed by the government authorities and revamped strong financial system.


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