India’s long-term growth prospects remain buoyant as the country will be endowed with a favourable demographic dividend. Given that India’s growth is consumption driven and the government has finally taken serious note of the need to boost the investment climate, the country is poised to witness a high growth trajectory in the long term, says Dr. Arun Singh, Senior Economist, Dun & Bradstreet India.
India’s aspiration to achieve the double-digit growth rate remains elusive as India’s GDP growth weakened considerably during the past few years, stumbling to a decade low during FY13.
India is at a crossroads today: in the face of a severe slowdown that was not precisely anticipated by government and private agencies and some hope of recovery brought about by easing inflationary pressures accompanied by cut in policy interest rates and some policy measures.
However, currently, risks in terms of sharp depreciation of the rupee threatening to widen the current account deficit further, failure in the revival of growth in the electricity and mining sectors, and slowdown in credit growth to the manufacturing sector threatens to push back the recovery process.
The aspect which adds to concern is that unlike the slowdown in growth in FY12, which was due to the dismal performance of industrial activity, deceleration in GDP during FY13 was broadbased. India is now grappling with both supply and demand side issues and concerns. The supply side bottlenecks which have posed a major constraint to growth have been largely ignored in the past with the probable assumption that India’s overall infrastructure will be able to support the rising population and cater to the demand brought about by the high growth witnessed during the last decade. Besides, the elevated and persistent inflationary pressures due to the demand-supply mismatch had weighed down heavily the growth momentum of the Indian economy.
While the factors behind the slowdown of the Indian economy have been many, it was primarily the slowdown in the investment activity and the downturn in the industrial production which in turn pulled down the services sector and the overall growth of the economy. Weakness in the investment owing to the lack of policy reforms to create a favourable environment to drive investment, regulatory hurdles limiting investment initiatives, high interest rates, elevated input prices, lack of sufficient demand, both domestic and external, and low business confidence have continued to affect the industrial activity.
India ranked 132 among the 185 countries in ease of doing business, as per data compiled by the World Bank (the rankings for all economies were benchmarked to June 2012). Hindrance in execution of infrastructure projects primarily in power and road transport and highways given delays in land acquisitions, environmental clearances, and lack of infrastructure support and linkages had also impacted growth. Moreover, issue of price pooling in the coal sector remains unresolved and restructuring of debt for state electricity boards has not yet taken place.
The slowdown in growth has also in turn impacted the infrastructure sector. Several projects are currently suffering from higher debt, low revenues and implementation delays. Tough market conditions have rendered several infrastructure companies incapable of raising more debt or infusing fresh equity. The slowdown has also been accompanied by declining financial viability of several power projects in the face of rising domestic coal prices. This is compounded by the depreciation of rupee which has increased the cost of coal imports and capital equipment.
Slowdown in demand and new orders has also limited the scope for Indian companies to put profit back into their businesses, thereby affecting capital investment in the nation. In addition, the weak economy has affected the domestic employment. According to the Business Optimism surveys carried out by Dun & Bradstreet India, it has been found that the employment scenario has been continuously deteriorating since Jan 2011, barring Q3 of 2012.
In addition, global growths prospects have not turned to be very optimistic. The recovery in the global economic activity has been very slow and uneven. Recently, the World Bank cut its global growth forecast for 2013 to 2.2 per cent from 2.4 per cent growth estimated earlier. The World Bank also downgraded its forecast for the developing countries to 5.1 per cent during 2013, less than the 5.5 per cent estimated earlier.
The protracted slowdown in the world economy has its implication for the world trading activities. India’s attempt to diversify its trading partners to boost its export growth could face impediments in such a scenario. Further, the growing trade deficit due to India’s inelastic demand for oil and gold is increasing pressure on current account balance at a time when FDI investment is slowing and the financing of current account deficit rests on the short term and volatile portfolio inflows. Weakening of rupee and weak FII inflows following the discussions about the US Federal Reserve withdrawing its stimulus programme adds more to the uncertainty.
Nonetheless, D&B expects the Indian economy to revive during FY14, although at a sluggish pace. The economy is undergoing a phase of consolidation which is expected to continue till September or October of 2013, post which we are likely to witness a steady growth of the domestic economy. However, revival in industrial activity will require the government to continue with its reform measures.
Further, inflationary pressures are likely to continue to abate providing space for monetary policy easing. The reduction in the policy rate by the RBI will aid in the restoration of the investment and hence the industrial activity. We expect the slowdown in the global economic activity to stabilise and waning of uncertainty among the corporate and consumers along with fiscal consolidation undertaken by the government to provide support to the economic growth. However, this will be contingent on a normal monsoon and no unanticipated shocks from the external sector.
India’s long-term growth prospects remain buoyant as India will be endowed with a favourable demographic dividend. Given that India’s growth is consumption driven and the government has finally taken serious note to boost the investment climate and bring about the necessary changes in the policy environment, India is poised to witness a high growth trajectory in the long term.