State of the Indian Economy – Health Check
July 6, 2012
PM Dr. Singh has said that he will continue as the Finance Minister beyond the Monsoon Session of the parliament and has entrusted the job of answering questions to MoS. Dr Singh’s first term as Finance Minister in 1991-96 resulted in liberalization and far-reaching changes. Pranab Mukherjee demited from the office with a Historically Weak Indian Rupee, High Inflation, Weak GDP Growth, Amending Laws With Retrospective effect, etc Let us check the health of Indian Economy and take a prudent view on to what extent Dr. Singh can turnaround the Indian Economy, which has to happen now or will never happen.
India’s 4QFY12 GDP came in at 5.3% YoY – the lowest quarterly reading in the current GDP series – even during the 2008-09 global crisis, quarterly GDP growth had troughed to 5.6%.
Agriculture in India after 65 years of Independence is still a Gambling in Monsoon – Monsoons have had a poor start, with cumulative rainfall in June being ~30% below normal. Agriculture employs ~50% of the workforce and only ~36% of India’s land area is irrigated. A poor monsoon could result in GDP coming in at 5.6%.
India’s Ratings Downgrade During the last few months, S&P and Fitch have revised their sovereign outlooks on India from stable to negative. While previous concerns on India have largely focused on its twin deficits – current account and fiscal – both Fitch and S&P in their much talked about “Will India become the first ‘fallen angel’ among the BRIC nations” report highlight slowing growth and its impact on fiscal consolidation coupled with political roadblocks as key factors behind the outlook change.
High InflationHeadline inflation in May, measured both the WPI and CPI, remained elevated at 7.6% and 10.4% respectively, with the uptrend largely on account of primary articles. GDP – Inflation will tell our money has negative growth.
RBI Passes the Blame on Pranab and Team In the last review, despite the sharp slowdown in growth, the RBI remained clearly concerned about inflation, stating
persistence of overall inflation both at the wholesale and retail level points to serious supply bottlenecks and sticky inflation expectations
RBI has stated that the role of interest rates is small and thus it feels that a reduction in rates could exacerbate inflationary pressures. further, the current slowdown in growth is largely due to a collapse in investment – which is due in large part to policy paralysis.
Deficits The sharp deterioration in India’s Current Account Deficit (CAD) from US$45.9bn (2.7% of GDP) in FY11 to US$78.2bn (4.2%) in FY12 has been key to the ~25% weakness in the INR. Higher imports – particularly oil and gold – have resulted in India’s trade deficits widening from ~2.5% of GDP in the 1990s to ~10% of GDP currently.
Amidst this backdrop, the PM Dr. Singh retained the FM portfolio and has sent a strong message that Policy Decisions and Reforms process will be accelerated. Sick of this Government’s corruption and impotent reforms process, let them perform in the next 6 months or perish.