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Indian
Economy 2011 - overview
India is developing into an open-market economy, yet traces
of its past autarkic policies remain. Economic liberalization,
including reduced controls on foreign trade and investment, began
in the early 1990s and has served to accelerate the country's
growth, which has averaged more than 7% since 1997. India's
diverse economy encompasses traditional village farming, modern
agriculture, handicrafts, a wide range of modern industries, and a
multitude of services. Slightly more than half of the work force
is in agriculture, but services are the major source of economic
growth, accounting for more than half of India's output, with less
than one-third of its labor force. India has capitalized on its
large numbers of well-educated people, skilled in the English
language, to become a major exporter of software services and software workers.
An industrial slowdown early in 2008, followed by the
global financial crisis, contributed to the deceleration in annual
GDP growth to 6.1% in 2009. However, India escaped the brunt of
the global financial crisis because of cautious banking policies
and a relatively low dependence on exports for growth. Domestic
demand, driven by purchases of consumer durables and automobiles, has re-emerged as a key driver of the economy,
as exports have fallen since the global crisis started. India's
fiscal deficit increased substantially in 2008 due to fuel and
fertilizer subsidies, a debt waiver program for farmers, a job
guarantee program for rural workers, and stimulus expenditures.
The government abandoned its deficit target and
allowed the deficit to reach 6.8% of GDP in FY09. The government
has expressed a commitment to fiscal stimulus in 2010,
and to deficit reduction the following two years. It has proposed
limited privatization of government-owned industries, in part to
offset the deficit. India's long term challenges include
inadequate physical and social infrastructure, limited employment
opportunities, and insufficient basic and higher education
opportunities. In the long run, the huge and growing population is
the fundamental social, economic, and environmental problem.
2011 mid-year review of the Indian economy
, a mid-year review of the Indian economy tabled by Finance Minister Pranab Mukherjee in parliament
showed on December 9, 2011. Following are the highlights from the review:
GROWTH
2011/12 GDP growth seen at 7.5 pct (+/- 0.25 pct).
The economy is likely to grow in the range of 7.25 percent to 7.75 percent in the fiscal year ending March 2012, sharply
lower than the original estimate of 9 percent
PUBLIC FINANCES
* Meeting 2011/12 fiscal deficit target of 4.6 percent of GDP will not be easy.
* Determined to keep overshooting of 2011/12 fiscal deficit target to a minimum level.
* Consolidated fiscal deficit may be marginally up than the target of 6.8 pct of GDP.
* Global economic uncertainty risk may impact India's tax receipts in 2011/12.
* Higher government expenditure due to rising subsidy bill needs policy initiatives.
* Decline in small savings collection has impacted government's cash management.
INFLATION
* Some easing of inflation has started and is expected to continue.
* Medium-term supply-side measures to address bottlenecks crucial.
* Overall inflation likely to decline from December; expects fiscal year to end with 7 percent inflation.
* Global slowdown could cool fuel, commodity prices, partially offsetting weak rupee's impact on imports.
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DIVESTMENT
* Achieving state-run firms' stake sale target of 400 billion rupees in
2011/12 will be a stiff task.
* Government likely to complete share sale of SAIL (SAIL.NS) , ONGC
(ONGC.NS), BHEL (BHEL.NS) by end-March 2012.
WEAK RUPEE
* Recent rupee depreciation may be seen as a lagged correction.
* Intervention in the local forex market should be limited, confined to controlling volatility, and not to alter the trend.
EXPORTS
* If situation in the U.S., EU worsens, services exports could be affected.
EXTERNAL DEBT
* External debt continues to remain within manageable limits.
Tough
times for Indian economy
The government had originally projected growth of 9 percent
in the fiscal year to March 2012. Now, analysts say India will struggle to grow even 7 percent, a sharp
drop from 8.5 percent in 2010/11. On December 15, 2011 report
says India's industrial output slumped more than 5 percent in October from a year
earlier, far worse than expected and the first fall in over two years.
Headline inflation has been above 9 percent for 12 consecutive months
despite 13 rate increases since March 2010 that have lifted the repo
rate -- the policy rate -- to a three-year high of 8.5 percent from 4.75
percent. While November's inflation was the lowest in a year, it brought little
joy to investors, who pushed up bond yields and swap rates.
The rapid depreciation of the rupee is going to throw out of the
calculations on inflation and import. The central bank reviews monetary policy on Friday, but with inflation
stubbornly above 9 percent it is widely expected to keep rates on hold.
Tight cash conditions in the money market have fuelled speculation that
the central bank might lower the cash reserve ratio, the percentage of
deposits banks must maintain with the RBI, as early as Friday. However,
a Reuters poll showed economists don't expect a CRR cut before 2012.
The
slide in the rupee
The slide in the rupee has caught policymakers flat-footed and by firing
up import costs it is undermining the RBI's forecast for inflation to
drop to 7 percent by March. The rupee fell to a fresh low of
54 per dollar on December 16, 2011 but moved upward on December
17. Many economists believe it will fall further, in turn keeping downward
pressure on Indian stocks, which are off 22 percent in 2012, among the
worst in Asia. The main index fell 0.76 percent on Wednesday.
While the central bank has stepped in to smooth volatility in the
foreign exchange market, it has not mounted a spirited defense of the
currency and is not expected to do so given limited reserves and the
need to fund a swelling trade deficit. The current account deficit hit $14 billion in the April-June quarter,
nearly triple the previous quarter's tally.
The risk is that a plunging rupee will be seen by investors as
to pull capital out of the country, adding yet more downward pressure on the currency and setting off a balance of payments crisis.
An 18 percent slide in the value of the rupee since July is adding to a growing worry of economic crisis in the country as stubbornly high
inflation ties the hands of the central bank from easing policy to try to turn a grim economic outlook.
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