Looks like the worst is behind us in terms of economic instability; and finally growth and reforms seem to be staging a comeback. One of the immediate tell tale sign is the softening of inflation, in fact the drop in headline inflation figures to an all time low of 5.96% in March 2013 has baffled economists and has called for prompt actions on the part of the Reserve Bank to consider immediate rate cuts and infuse much needed liquidity into the system.
While recent fiscal reforms and policy agility are yet to demonstrate concrete results, few of the prudent measures such as diesel price hike and tighter norms on LPG subsidy mean less cash burnt on wasteful subsidies and more funds available for meaningful public spend. On the industrial output front, FY 13 proved to be one of the worst years in recent history with several of the marquee sectors posting flat to declining growth results. Consumption has remained soft as most preferred to play wait-and-watch. Exports have remained weak partially due to slowdown in the West while on the other hand, imports continue to surge on the back of huge gold rush and surging oil imports thus putting significant strain the country’s balance of payment. Our insatiable hunger for gold is causing serious trade deficit and tremendous pressure on our foreign currency reserves thus leading to an artificial weakening of the Rupee.
Let us take a closer look at some of the facts and figures of the Indian economy. India boasts of a large English speaking base of cost-competitive skilled manpower. Approximately 65% of India’s population in the working age group of 15 to 64 years with a median age of 26.2 years – lower than most countries in the world. Approx. 4.2 million people are added to the talent pool every year, with 4 million graduates and 0.26 million post-graduates. By 2025 India is expected to become the fifth largest consuming country with middle class expected to increase 12 times between 2005 and 2025. Private domestic consumption accounts for 58 % of GDP. Fast growing infrastructure sector Investment on Infrastructure sector doubling in each Five-Year Plan Total investment in infrastructure projected to be around US$1 trillion during the 12th Five Year Plan (2012–2017) – one of the largest in the world, 50% expected to be contributed by the private sector.
In 2012-13, GDP growth moderated on account of recessionary conditions in the west and investment slowdown at home. The economy is expected to recover gradually to 6%+ growth in 2013-14. Inflation has shown a downward movement in recent months and stands at 6.8% for February 2013, down from 9.5% in February 2011. Food inflation has remained stubbornly high and is a cause for concern. Supply side bottlenecks are responsible for still high level of food inflation. Deregulation of fuel prices responsible for rising Inflation in fuels. The RBI increased the reverse repo rate and the repo rate several times till October 2011, in order to tame inflation; however, this cycle has peaked and the RBI has started cutting key policy rates since April 2012. The RBI has also reduced the Cash Reserve ratio (CRR) to contain the shortage in liquidity. The CRR has been reduced by 200 basis points since January 2012 releasing funds into the banking system. The RBI has also been conducting Open Market Operations (OMOs) to further ease the liquidity situation. Fiscal Deficit for 2012-13 stood at 5.2% of GDP, lower than the previous year’s level of 5.8%. Budget 2013 has projected a decline in the deficit to 4.8% of GDP in 2013-14. Fiscal Deficit to be progressively reduced to 3.0% by 2016-17. However, subsidies on account of food and fuel may cause a problem.
Monetary Policy and Financial Reforms: Gradual move away from tight monetary stance. Reduction in Statutory Liquidity Ratio (SLR) form 24% to 23%. Cut in Cash Reserve Ratio (CRR) from 4.75% to 4.00%. Easing of repo rate by 100 bps in 2012-13. Cabinet has approved 49% FDI limit (as opposed to 26% currently) in insurance sector; bill needs to be passed in Parliament. FDI limit in Pension funds to be hiked in line with the insurance sector once the PFRDA Bill is passed in Parliament.
What all these indicate is that FY 14 looks to be quite promising. The mood is already upbeat and demand is beginning to show an uptick. What will likely see us through this slump though is a set of measures to stoke growth in the domestic markets. Prudent strategies predicated on deep understanding of consumer needs and trends will prove to be the vital difference between success and failure. It is now clear that recessionary trends in the West is going to take quite a while to reverse; companies that have betted heavily on European assets
are beginning to the pay the price for hubris and empire building tendencies with record losses and write-downs. It is time now for companies to take a realistic view of growth opportunities in domestic markets and rekindle demand at the base of the pyramid, where the majority of growth opportunities still exist in India.