India’s economy - Uncertain times

Monday, January 16, 2012 | Posted by: Grant Thornton
Categories: India, India Watch Issue 15 | Tags: India, economy, Grant Thornton, performance, growth, India Watch, emerging markets, inflation, India Economy, interest rates, inflation 2011, interest rates 2011, India Economy 2011, Rupee Devaluation 2011, Rupee, political direction, economic advisory council, stock exchange

As we enter what will hopefully be a more promising year in economic terms for many of the world’s economies, let us take this opportunity to take a look back at the year just passed.

2011 was somewhat of an annus horribilis, with natural disasters in Japan and New Zealand, political uprisings across North Africa, riots in some of the UK’s major cities and what could still be, an economic time-bomb in the form of the Euro-zone debt crisis. All these factors, and many others, led to the continued economic uncertainty seen in both 2009 and 2010, and India, like many other emerging markets was not immune to the global economic turmoil.

India’s economy continued to suffer from a number of economic factors (as discussed in previous editions) such as a lack of growth, inflation, a weak currency and, most importantly, poor political direction. As a result, the country’s major stock exchanges went into relative free-fall. The National Stock Exchange’s 50 stock index, Nifty, declined nearly 23% over 2011 making it one of the worst performing stock exchanges in the world. The Bombay Stock Exchange’s Sensex index also suffered significantly, seeing a fall of nearly 22% over the year.

Furthermore, a record low rupee added to India’s economic headache. In December, the rupee reached a record low, down around 20% against the dollar since August – making it the worst performing Asian currency in the last quarter. To make matters even worse, C.Rangarajan, chairman of the Prime Minister’s Economic Advisory Council, said that that there was little policymakers could do to counter the rupees’ decline. The rupee’s weakness, which has been driven primarily by weakening economic data, has pushed up the price of imported goods, adding further fuel to India’s on-going battle with inflation.

Inflation itself has remained around the nine per cent mark despite 13 interest rate rises in less than a year and a half. However, in December, India’s inflation slowed to its lowest level in twelve months, leading to a pause in interest rate rises. Food inflation rates, a key driver of overall inflation, levelled off to around 6.5% from the start of the year, the lowest level in over three years. Nevertheless, with an underperforming currency and a slowing economy, the government’s timing from which it expects inflation rates to start easing on a continuing basis might need to be revisited.

In respect to India’s slowing economy, The Reserve Bank of India has again revised its economic growth rate lower. In its most recent revision, is said that it expects the country’s economy to expand 7.5% in the year ending March 31 2012 – down 0.4% from its forecast earlier in the year. BNP Paribas also cut their India 2011-2012 GDP forecast to 6.5%, in their latest economic report, down from its earlier projection of over seven per cent. The bank cited sliding capital expenditure and the country’s exposure to European Banks for its rate cut.

However, while India’s economy has some exposure to European Banks, its main problems come from within. In the second quarter of India’s financial year, the country’s economy grew by only 6.9%, the lowest level in over two years. While healthy monsoons have boosted agricultural output, the weakness of the country’s mining and manufacturing sectors has brought overall growth rates down significantly.

So, what is next for India’s economy? Prime Minister Singh is halfway through his second term in office and is under continued pressure to revive a strong legislative agenda to help restore and lend direction to the country and its economy. However, with major corruption allegations still unresolved, it looks unlikely that the economic reforms required will come to fruition. Furthermore, with at least five regional elections due in the coming year, economic pressures look to be just one of many which Prime Minister Singh and his government will face in 2012. What this will mean in real terms for India and its economy is unknown and any prediction here would be fruitless but let us hope suitable actions can be taken to drive India forward.

Anuj Chande
Partner, Corporate Finance
and Head of South Asia Group
Grant Thornton UK LLP
T +(44) (0)20 7728 2133

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