Hopes rekindled for Indian economy

At a time when the global economy is facing serious challenges with some developed nations in stagnation, a 5-6 percent growth forecast for India during the fiscal year ending March 31 is cause for cheer.
The fact that such growth will come about amid spiralling fuel prices, which pose an even greater challenge for an energy-starved country like India, and a general slowdown in demand for goods and services the world over is, indeed, even more commendable.
This, with far-reaching reforms executed in succession since September last year — some such as decontrol of petroleum fuel pricing and hikes in rail ticket fares given effect to despite opposition — means Prime Minister Manmohan Singh’s government means business.
“Today the Eurozone crisis is still continuing. There is recession in Europe, Japan and Brazil. Naturally, these affect us. Still our economy is witnessing growth and it will be 5.5 percent this year,” Finance Minister P. Chidambaram told his party colleagues recently.
“We should not without any reason denigrate our own performance and record. I have no doubt we will come out of trough. We will climb back to a growth rate of between 6 and 7 percent next year and then 7-8 percent in the year after,” he said at another forum.
Since 2008, when the global economy faced the worst slowdown in eight decades, India also encountered major challenges. In a globalized era such as today’s, developments outside were bound to take their toll on the domestic economy.
Two challenges stood out. Ever-rising inflation caused by demand-and supply-side factors that dented people’s pockets and retarded real growth. Second, spiralling fuel prices and slowdown in merchandise exports, which swelled India’s current account deficit.
On both these counts, the steps taken ensured the economy absorbed the shocks well. The Reserve Bank of India (RBI) kept the interest rates under check to curb inflation, while the government allowed successive hikes in fuel prices to check fiscal deficit.
“The fundamentals of the economy are strong,” said former central bank governor Bimal Jalan. “The India of today is vastly changed compared with earlier decades when there was constant balance of payment problem, we were dependent on foreign aid, the rate of growth was low, the investment rate was low, the record on project execution was poor, and the corporate sector was bound by a licensing system,” he said.
“Fortunately, much of that is over. We are on the forefront so far as technological capabilities are concerned, so far as entrepreneurship is concerned, so far as the investment drive is concerned.”
Through the difficult period of 2012, India remained a favored investment destination, despite threats of downgrade by rating agencies, which would have been disastrous for attracting foreign capital. The country was also fortunate on several counts:
• It continued to remain the largest recipient of inward remittances from its expatriates abroad of $68 billion in 2012;
• Exports of software and related services continued to grow at near double digits to log around $70 billion; and
• Foreign funds pumped in an estimated $24 billion into the stock markets that was one of the largest-ever such investments in a single year.
Due to these and other factors, India’s foreign exchange reserves today remain healthy at around $300 billion. The inflation rate has come down from double-digit levels to a more manageable 6.2 percent. Factory output and exports have also started to look up.
The value of the Indian rupee, which was seen depreciating to an alarming Rs.60 to a dollar, has strengthened. This apart, top ministers, on an overdrive since January with road shows across the globe to attract investors, have promised to cut deficit sharply.
Little wonder then that India’s stock market is on a roll. In fact, it ended 2012 as the third best performer globally, with a return of 25 percent from the Sensex of the Bombay Stock Exchange, just behind Thailand Set Index and Germany’s Deutscher Aktienindex.
For global investors, there was much to cheer, notably since September, when Prime Minister Manmohan Singh managed to change the perception of policy inaction with far-reaching decisions that had been hanging fire for years:
• Conditions were further eased for the entry of single-brand retail chains such as IKEA with 100 percent foreign equity;
• Rules were changed, permitting up to 51 percent foreign equity for global retail chains such as Wal-Mart, Tesco, Carrefour and JC Penny;
• Bills were cleared to make eventual legislative changes that will ease India’s financial sector further in areas like banking, insurance and pension;
• Decision was deferred for two years on a much-feared anti-tax law that sought to give sweeping powers to check evasion, especially by foreign investors; and
• Pricing of petroleum products was freed and train fares hiked to ease the burden on the federal fiscal deficit.
There was a time not too long ago when all these steps, one thought, may be taken, if at all, only after the national elections in 2014. But, having surprised the investor world, the perception today is of an India on the move, with solutions to problems within reach.
“If I look at India, the issues for me are the opposite of the problems we are trying to solve in the West. In the West we have demand-constrained economies,” Anshu Jain, the Indian-born chief executive of Deutsche Bank, said in a recent interview.
“India is different. It is not demand-constrained, but supply-constrained. It has some of the greatest gifts in the world — expanding demand, vast amounts of cheap deployable land and a demographic boom of a population getting younger and more literate,” he said. “Overall, I think most would rather have India’s problems than the West’s as it is far easier to solve these supply-side problems than overcome structural demand-side ones.”