Can Indian FM Handle High Inflation & Twin Deficits ?

One of the Major Problems with Indian Democracy is incompetent Politicians capturing core Portfolios like the predecessor of Mr. P. Chaidambaram did dwindling the Fiscal and Current Account deficits to new highs, weakening India’s greenback and no control over Inflation. Every Macro Researcher on the Indian Economy asks can they be back under control in 2013 ? Yes, but we do not think any of these measures will reach truly comfortable levels in the next few years.

After a sharp recovery from the Global Financial Crisis (GFC), India’s economy struggled in 2011-2012. Growth halved from above 11% yoy in Q1 2010 to just over 5% in Q3 2012, inflation has averaged 9% for nearly three years, the fiscal and current account deficits have widened to historic highs, and the INR depreciated by some 25% against the USD since mid-2011.

We see modest further progress on inflation in 2013, primarily from disinflation in non-core components, benign view on global oil supply and prices and a food price path that assumes a normal monsoon season. Still, inflation expectations and core inflation are likely to remain elevated.

India will need better macro performance and concerted policy action to fundamentally tackle elevated inflation, inflation expectations and the twin deficits. With the expected favorable global backdrop and continued movement on structural reforms, we do not think borrowing or the external balance will pose an acute problem for India in 2013.

The elections scheduled for 2014 pose upside risks to the fiscal deficit in particular as the Government has lost its way and is desperate to come back to power with unethical measures like Direct Cash Transfer, etc