Wednesday, 28 December 2011

Crouching Tiger, Hidden Growth

India’s economy is currently a wounded animal. Blackened by the lack of global demand for its goods, bruised from a manufacturing slowdown and beaten by the whip of high inflation. Growth, in the country seen as the main long term rival the China, has slowed from the high levels of 9-10% talked about in the early spring to 6.9% in late 2011. Policymakers in the Asia’s third largest economy have reached a crossroads. After increasing the interest rate 13 times since the start of 2010 to combat soaring inflation levels, the slowing of growth has led to calls for a reverse in the Central Banks actions. Economists have even begun questioning whether India still has its snarl or whether it has simply retreated back into the jungle of economic underperformance.

Firstly it must be remembered that it is all fast growing emerging economies, not just India, that are suffering from capacity constraints, volatile capital flows and a slowdown in external demand (due to the Debt crises in the euro zone and the US). However the slowing of India’s economy has mainly been put down to the suffering of the country’s manufacturing and mining sectors.  With growth in the former sector slowing to 2.7% in the three months to September, compared to the 7.8% rate a year ago. And with the sector contributing to around 16% of the nation’s gross domestic product, its demise is hurting India. Combine that with the continuing problems in the euro zone, which are hurting export levels, and deteriorating domestic demand due to the month-on-month increase in the interest rate by the Reserve Bank of India (RBI). The continuing lack of demand in India’s overall economy is worrying and shows not immediate sign of improving.

Inflation levels has been hurting India and shaping its policymaker’s decisions for well over a decade now. The current administration of Manmohan Singh has been unable to tame near double digit levels despite the RBI’s implementing contractionary monetary policy, with the rate reaching 9.7% in October. The fall in the Rupee against the other major currencies, with it reaching a historic low against the Dollar in December, is the main reason for the high price level. The costs of importing many goods, services and raw materials have risen, because of the weakness of India’s currency, and it’s leading to increased prices for India’s consumers. Privately there are fears from within Singh’s administration that fear that India could return to ‘Hindu’ growth levels (of around 5%) unless they can stop the economic rot, and stop it soon.

The tiger has fought back however. With the Indian cabinet agreeing to a key reform which will lead to increased Foreign Direct Investment into the retail sector and the RBI leaving the interest rate unchanged, demonstrating a change in their policy targets of putting growth before inflation. However the success of the opening up of the retail sector is still very much in the balance with coalition allies and the opposition challenging the ruling. Moreover forecasters are warning that India face a tough fiscal year with a cocktail of domestic and global challenges. So as India lies injured trying to lick its wounds, the challenge to its policymakers to revive high levels of growth in 2012 are great. While the current rates of growth for India are not necessarily alarming, there is the real prospect of the high growth rates which the Asian country has become accustomed to could become extinct.  

Author: Thomas Viegas

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