Wednesday, December 28, 2011

Is India growth story still intact?


As the India growth story started to look shaky, the already risk averse foreign investors seemed to be the first to take flight.

2011 was a year that's been hard on the country and its economy, given that the industrial growth slumped, investor confidence waned, markets turned sluggish, the government's finances went out of whack - and above all the rupee depreciated beyond control.

The only thing that looked up was Inflation.

So is the India Shining Story suddenly left looking suspect?

At the start of 2011, the Indian economy seemed to have come through the global financial crisis relatively unscathed and was set to achieve near 9 per cent growth. But as 2011 began cracks were starting to show up in the India growth story.

A heady combination of strong demand, high input prices and supply side constraints had left the economy with stubbornly high inflation.

Wholesale inflation had stayed above 8 per cent despite six interest rate hikes in 2010 and as the year moved along the problem only got worse with wholesale inflation hitting a high of 10 per cent in the month of September.

As prices soared the Reserve Bank of India had little choice but to raise rates further.

Through 2010, RBI governor D Subbarao known in policy circles as a man who believes in measured and calibrated actions had chosen to stick with small 0.25 per cent hikes in moves that he termed as "baby steps".

But as inflation continued to soar, the RBI was forced to move away from baby steps towards more aggressive rates which continued through the year taking the benchmark rate to 8.5 per cent – a process which finally seemed to come to a close at the year ended with some early signs of food and primary article prices easing.

“I am still worried about inflation in manufactured goods picking up. It is too early for the RBI take a call on cutting interest rates,” said Pronab Sen, Planning Commission.

The decision to put an end to interest rate hikes came against the backdrop of a sudden and steep slowdown in the economy.

While the rising cost of money curbed consumption in the economy to some extent.

It was investment that took a real hit pulling down industrial growth to -5.1 per cent in October – the lowest seen since March of 2009.

The combination of high interest costs – a standstill in government decision making and the still continuing global crisis – dented confidence and pulled down growth in the broader economy as well.

The RBI brought down its growth forecast for the year to 7.6 per cent and may reduce it further in January. The government now pegs growth for the year at 7.5 per cent but forecasters are far more bearish and expect growth to tumble well below 7 per cent.

But others point out at even at sub 7 per cent growth India will remain one of the fastest growing economies.

Shankar Sharma, chief global trading strategist, First Global, feels it is fine even the growth rate stands between 5.55 – 7 per cent.

As the India growth story started to look shaky, the already risk averse foreign investors seemed to be the first to take flight.

As Dollar outflows picked up against the backdrop of a widening current account deficit and talk of a fresh balance of payments crisis started to do the rounds.

The Indian rupee plummeted hitting fresh record lows of 54.30 to the dollar and will close the year as the worst performing Asian currency with nearly 20 per cent in losses. This is even after the RBI tried to stem speculation by curbing open forex positions.

The measures seemed to have calmed the markets for the time being but the skeptics of the Indian currency now abound including Chris Woods of CLSA who warned that the rupee could hit 60 to the Dollar.

"Apart from growth the bigger problem with India is the continuing balance of payment problem which is bringing the rupee down, which may help growth in the medium term," said Wilbur Ross, chairman of WL Ross & Co.

As the year closes the Indian economy seems to have come full circle. Experts fear a weakening rupee may add to inflation once again.

Yet the worst of the growth slowdown may be still to come leaving policymakers facing with a year ahead that could bring with it even greater uncertainty and tougher decisions.