India’s United Progressive Alliance must act decisively for effective change
Saturday, July 16, 2011 | Posted by: Grant Thornton
Categories:
India,
India Watch Issue 13
| Tags: India,
economy,
China,
growth,
India Watch,
UK,
South Asia Group,
Anuj Chande,
Capital Markets,
inflation,
RBI,
Reserve Bank of India
This halfway point in the calendar year provides us with an ideal opportunity to review India’s economic and political status over the past few months and also to look forward to what the remainder of the year might have in store.
There seems no better item to start with then what has now become a fairly routine announcement from the Reserve Bank of India (RBI). Last month the RBI raised interest rates for the 10th time in 18 months. The repurchase rate was raised by 25 basis points to 7.5% as the RBI continued to try and curb inflationary pressure. As with the first quarter of the year, wholesale-price inflation (around 9.1% year-on-year to the end of May) continues to be fuelled by high oil prices and strong domestic demand.
Let it not be forgotten though that, through tighter monetary policy and favourable monsoons, inflation in India has reduced significantly since the beginning of 2010 (c.16%). However, inflation remains at a significant level, and one which is beginning to affect economists’ outlook on the country’s ability to reach economic growth levels of over 9%. On 1 June, The Economist Intelligence Unit (EIU) forecast that while consumer price increases are set to slow this year to around 8.1%, the impact of high oil prices and other commodities will continue to counteract this and maintain pressure on inflation levels.
As highlighted above, the persistently high levels of Indian inflation are beginning to cause concern among economists. While there continues to be an unprecedented potential for growth within India, inflation levels (and the budget deficit) could seriously hamper these prospects. The EIU previously estimated growth in real GDP (on an expenditure basis) of 8.8% for the last fiscal year, however, they see economic expansion slowing slightly over the next fiscal year (8.6%) and then averaging around 8.8% between fiscal years 2012 and 2015. This forecast is significantly short of the government’s target for GDP growth of 10% in 2012 but with the issues mentioned previously along with slow infrastructural development and continued shortages of skilled workers, a growth rate of 10% seems far too ambitious.
On a seperate note, in addition to the persistent economic issues, there are also a number of concerns as to the political stability of the country. The Indian National Congress-led United Progressive Alliance (UPA) coalition government which is headed by the prime minister, Manmohan Singh, is being undermined by a number of well reported corruption scandals and dogged inflation levels. While prime minister Singh and his coalition government can take a great deal of credit for maintaining India’s high growth rate over the last few years, the coalition’s popularity is beginning to wane. Some political analysts are even questioning whether the UPA will remain in power until the end of its current term (2014). For the time being, however, general opinion shows moderate support for the current government with no drastic changes being demanded.
Nevertheless, as highlighted by the EIU in its June report, the expectation is that Mr Singh’s government is likely to face some stern tests during the remainder of its term – tests such as tackling corruption, reducing inflation, reducing the budget deficit, maintaining infrastructure spending and encouraging economic growth. On top of that, socio-political issues are also coming to the fore with insurgency activity in eastern and central India and uprisings in the Kashmir region. It goes without saying but these are all substantial issues which will not go away easily and the government, even though under some pressure from its electorate, will need to act fast and decisively.
Over the last few months there have been a number of articles written on the Indian economy with many of them highlighting the unexpectedly flat growth rate of the country. However, the same could be said for nearly all global economies and we must bear in mind that India’s growth rate is still significantly higher than most. Furthermore, India’s strong growth fundamentals, which include high savings and investment rates, fast labour force growth and a rapidly expanding middle class, will ensure a long and steady economic performance. It’ll certainly take longer than the government would like to admit but double digit growth in India is possible and when it does come, it’ll hopefully be in a much more economically stable environment.
Anuj Chande
Partner and Head of the South Asia Group
Grant Thornton UK
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Other articles in this issue of India Watch include:
Grant Thornton India Watch Index outperforms all major London indices for the first half of 2011
Sustained momentum in India M&A deal activity
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