Bold but politically unpalatable reforms such as freeing up the labour market are necessary to permit a higher rate of sustainable, non-inflationary growth
India weathered the global financial crisis comparatively well, with growth slowing to a still solid 5.8% at its weakest in the March 2009 quarter. Since then, the economy has recovered speedily, with GDP expanding 8.6% in the March 2010 quarter and accelerating to 7.4% for the entire fiscal year from 6.8% last year. Encouragingly, growth was driven by soaring private-sector investment even as rapid inflation dampened consumption. The near-term outlook is generally bright as surging investment and recovering exports drive should deliver growth near this fiscal year’s 8.5% target. But risks remain that could prevent the economy from maintaining this pace over the next decade.
Apart from possible negative international developments such as a renewed downturn in the US or a worsening of Europe’s debt woes, soaring prices and the government’s fiscal woes are the most pressing domestic economic concerns. The Reserve Bank of India has started to tighten policy, but needs to do more as wholesale inflation remains just under 10%. Much will depend on the strength of the monsoon given the impact of food prices, but capacity constraints mean the supply side is also underpinning rapid inflation as prices for manufactured goods have been gathering momentum in recent months. Further rate hikes, even as much of the world maintains very loose monetary settings, would be expected to put upward pressure on the rupee and weigh on exports.
With the trade deficit expanding rapidly, the authorities are concerned over the potential damage to exports from a stronger rupee, but cheaper imports and inflows of capital would be positive for domestic investment. The trade deficit rose to just under $100 billion for the year in April, well below the previous peak of $122 billion in 2008. The current account gap looks likely to widen to 2.2% of GDP in 2010 as domestic growth outpaces export, but it should be easily contained at under 3% of GDP this year. With nearly $300 billion in reserves, India should easily avoid the sort of funding crisis suffered by some countries with similar debt concerns.
India weathered the global financial crisis comparatively well, with growth slowing to a still solid 5.8% at its weakest in the March 2009 quarter. Since then, the economy has recovered speedily, with GDP expanding 8.6% in the March 2010 quarter and accelerating to 7.4% for the entire fiscal year from 6.8% last year. Encouragingly, growth was driven by soaring private-sector investment even as rapid inflation dampened consumption. The near-term outlook is generally bright as surging investment and recovering exports drive should deliver growth near this fiscal year’s 8.5% target. But risks remain that could prevent the economy from maintaining this pace over the next decade.
Apart from possible negative international developments such as a renewed downturn in the US or a worsening of Europe’s debt woes, soaring prices and the government’s fiscal woes are the most pressing domestic economic concerns. The Reserve Bank of India has started to tighten policy, but needs to do more as wholesale inflation remains just under 10%. Much will depend on the strength of the monsoon given the impact of food prices, but capacity constraints mean the supply side is also underpinning rapid inflation as prices for manufactured goods have been gathering momentum in recent months. Further rate hikes, even as much of the world maintains very loose monetary settings, would be expected to put upward pressure on the rupee and weigh on exports.
With the trade deficit expanding rapidly, the authorities are concerned over the potential damage to exports from a stronger rupee, but cheaper imports and inflows of capital would be positive for domestic investment. The trade deficit rose to just under $100 billion for the year in April, well below the previous peak of $122 billion in 2008. The current account gap looks likely to widen to 2.2% of GDP in 2010 as domestic growth outpaces export, but it should be easily contained at under 3% of GDP this year. With nearly $300 billion in reserves, India should easily avoid the sort of funding crisis suffered by some countries with similar debt concerns.
Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).
For More IIPM Info, Visit below mentioned IIPM articles.
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IIPM: Indian Institute of Planning and Management
IIPM makes business education truly global
IIPM B-School Detail
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).
For More IIPM Info, Visit below mentioned IIPM articles.
Prof. Rajita Chaudhuri's Website
domain-b.com : IIPM ranked ahead of IIMs
Arindam Chaudhuri's Portfolio - he is at his candid best by Society Magazine
IIPM Best B School India
Management Guru Arindam Chaudhuri
Rajita Chaudhuri-The New Age Woman
IIPM's Management Consulting Arm-Planman Consulting
Professor Arindam Chaudhuri - A Man For The Society....
IIPM: Indian Institute of Planning and Management
IIPM makes business education truly global
IIPM B-School Detail
