India sees significant growth in key sectors

Wednesday, April 21, 2010 | Posted by: Grant Thornton
Categories: | Tags: India, economy, Grant Thornton, global, India Watch, South Asia Group, emerging markets, GDP, South Asia, economic, Capital Markets, Alex Wright, London Stock Exchange, sectors

While the world’s recent economic focus has predominantly been on activities in south-eastern Europe, there continues to be key economic developments throughout many of the world’s emerging markets.

Over the last quarter, India saw significant growth in the vast majority of its key sectors. The Economist Intelligence Unit (EIU) highlights a number of sectors whose improved performances have aided economic growth. During the year to January 2010, industrial production grew by 16.6%, manufacturing output grew by 17.9% and output from mining and utilities grew by 14.6% and 5.6%, respectively.

The improving economic environment in India has led the EIU to revise up is forecast for real GDP growth in the fiscal year 2010/2011 to 7.7% , up 0.4% from its previous forecast. It should be noted that, as mentioned in previous India Watch economy reports, while this growth forecast is significantly lower than actual GDP growth seen before the economic downturn, it remains one of the highest growth forecasts in Asia. The revised forecast has also led the EIU to revise upwards its forecast for the fiscal year 2011/2012 to 8%. However, if the economic resurgence continues as it has done over the last 6 months, it won’t be too long before both these forecasts will have to be amended upwards again.

Nevertheless, as is nearly always the case, such significant economic growth does not come without a downside - in this case, inflation. Unfortunately for India, this downside has been exacerbated by the worst monsoons the country has experienced for nearly a quarter of a century, resulting in higher than average food prices. Wholesale price inflation hit 9.9% year on year in February, its highest level since October 2008 and data from the EIU states that food prices increased by 17.8% in February, rising further from the 17.4% increase already seen in the previous month.

As a result of this increasing inflationary pressure, on 19 March 2010, the Reserve Bank of India (RBI) raised the country’s interest rates for the first time since 2008. The repo interest rate (the rate at which the Central Bank lends money to other banks) and the reverse interest rate (the return banks earn on funds lent to the RBI - thus reducing liquidity in the banking system) were taken up 25 basis points each, to 5% and 3.5%, respectively. While this initial interest rate increase may help ease some of the inflationary pressure in the short term, it is expected that this pressure will remain intense over the next few months forcing the RBI to tighten monetary policy further.

With regards to the economic impact on the Rupee, the EIU notes that, even with expected GDP growth and increased investor confidence, the ongoing inflationary pressure and other fiscal risks may present the possibility of downward pressure on the Rupee over the course of 2010. Nevertheless, India’s economy continues to grow at an incredible rate, which, in the medium to long term, should enable the government to promote plans to reduce the country’s fiscal deficit.

On a final note, with the ongoing recovery of the global economy, there have been significant developments on the capital markets front, specifically between India and London. The recent proposed listing to the Main Market of the London Stock Exchange of Essar Energy, a subsidiary of Essar Group, India’s second largest private power group, has hopefully revived India’s global listing ambitions. The power company is looking to raise £1.6 billion through an IPO, making it the largest raise in London for 4 years and the largest ever IPO by an Indian business. The successful listing of Essar Energy, expected at the end of the month, will hopefully open up the gates for other domestic and international IPO’s across the global markets.

Alex Wright

Executive, Capital Markets, South Asia Group
Grant Thornton UK LLP