In the 1st part of the article on “Indian Economic Growth may slowdown in 2011” – we saw how high inflation, slow reformist movement, earnings slowdown, high fiscal deficit and volatile industrial growth can hamper the future growth prospects of the country in near-term.
Further to it, we have some more reasons to discuss over here for our readers:
Contents
Reason 6) Rising Interest Rates – Renders Working Conditions Costly!
One thing for sure – Cash is King! Logically, holding cash reserves acts as a liability. Hold cash in one hand and inflation in another – wipe both the props in your hand against each other. Outcome: your cash gets eroded in its value and inflation reigns.
However, your cash can survive this onslaught of inflation in the rising interest rate scenario on the back of higher returns on investment. Thus, depositors get rewarded for holding the sheer cash liquidity in high-yielding investment avenues such as bank fixed deposits.
But, the opposite also holds true. If you’re a borrower, you are standing on the wrong side of the system. A borrower could be a corporate entity looking to expand the business or even an individual looking to raise a loan for buying home or a car.
Thus, rising interest rate scenario can directly impact the growth prospects of a nation as it sums up to costly working conditions and operating environment.
Ground Reality: RBI raised repo (6.5%) and reverse repo rates (5.5%) by 25 bps in a bid to tame inflation. Moreover, bankers believe another 50 bps hike could well be in the offing soon. So, will these measures actually tame inflation or choke the growth rate?
Reason 7) Fiscal Deficit – The Unbudgeted woes!
When a government’s expenditures exceed the revenue that it generates, it is a case of fiscal deficit. Though, fiscal deficit is not necessarily a negative economic event, a controlled fiscal situation points towards a balanced budget policy of a country.
More recently, RBI had indicated that managing inflation through monetary policy becomes more of a challenge if the fiscal deficit goes unguarded. The government has set a deficit target of 4.8% of GDP for FY12.
Analysts are of the opinion that delay in reform rollover such as implementation of GST, adoption of food security bill, pass on of the oil subsidies to the final consumers could affect growth and delay fiscal consolidation.
Ground Reality: One-time revenue spinners such as spectrum auctions and disinvestment proceeds – which accumulated nearly Rs.1.5 lakh crore this fiscal – won’t turn up next year. However, as higher daily wage payments and new entitlements to right to food, chips into the system, the targeted deficit of 4.8% would be tough to contain with.
Reason 8) FII Selling – Moving back to the West!
Calendar year 2010 has seen net equity inflow to the tune of $29 billion, or Rs.133, 000 crore in rupee terms. In a major trend developing off late, the preferred route of investment for overseas investors to pump money into India has been FII inflow rather than FDI inflows.
This is of bit concern as some noted economists point out that FII inflow can reverse on signs of even slightest deterioration in the macro-economic indicators of the country. On the other hand, inflows routed through FDI are more stable and long-term integrating with the economy. FDI inflows have been decelerating since last 4 quarters.
Take, for example, the FII outflows in January 2011 totalled at Rs. 4813 crore on the back of growing concerns of untamed inflation eating away growth prospects. These FII outflows hardly amount to a fraction (1/29th) of the humungous $29 billion inflows witnessed in 2010. Yet, the volatility in the equity markets is unprecedented – stock markets have already corrected by almost 15% from its recent peak.
Ground Reality: If the FII inflow dries up, it could pose a significant risk of Balance of Payment position of India internationally.
Reason 9) Global woes – India still not decoupled yet!
Market analysts have a tendency to repeatedly use this vague axiom – decoupling story of India. They use this phrase time and again to support their theory of a Buy rating on emerging India growth story. But, ever since the last decade, the decoupling theory has never lived up to its expectations.
In fact, ever since the India story has bloomed – it finds itself more and more attached to the global economy. It is now more coupled than ever before. Moreover, this can be sensed from the fact that even with a slightest of positive data from the US economy, the hot money has deserted from the Indian shores to seek safety in undervalued American stocks.
The European economy is still in doldrums. During the 2008-crash, Indian IT sector had made a conscious effort to diversify their outsourcing business away from America, to other geographical locations such as Europe. But, to their dismay, the recession has widely spread its wings across the Europe.
Ground Reality: Neither India, nor China has ever decoupled from global markets. With increasingly globalization, no country can avoid negative impact of trade and business with overseas partners.
Reason 10) Unforeseen Events – The Nature’s Fury!
The global warming is the biggest issue for the environmentalists today. Every few days we get to hear the news of either an earthquake or tsunami or a volcano erupting and damaging life and trade across the world.
Nature has its own way of taking revenge against the man-made destruction of environment. In this new century, the magnitude of such natural occurrences is so huge that it can devastate the whole of village or district where it strikes. It severely affects the logistics and trade in the area and alienates the location for days together which can hurt the economic activity for a prolonged period.
So, can India growth story storm the crisis in 2011?
Dear Viral, thank you for making me think about economy and development of India through a fine article. One thing always come in my mind when I think about villages of India and same of developed countries in a comparative way that people of villages our country make themselves more busy in social factors than developing factors like agriculture unlike people of developed countries.It may be a socioeconomic prohibitory factors for development. Please make a comment on my view.
I like it baecause of i got it lotof information regarding slovely growth in the indian economy.
now it becomes easy 2 know about indian economic system……..
helps the young economists to have a vivid & precise view of INDIA.THANKS A LOT!
have a look…………..
not so enough.
Defines a pragmatic view of capital market in terms of economic growth.Thanks sir, this blog of yours is helping me a lot in my research.
Information good but Govt. policy or RBI rules for common people those rules not followed by upper class.
like:)))))))))))
Very interesting & thoughtful fact… a must read for all who really want to know the reason behind ongoing sloe down of economy in the world & in Indian market.
looking good
Dear Viral,
Good article and good reasoning. I would like to add. One more aspect of the govt. policies which is affecting us is the slow turning of our country into an excessively welfare state. Let me explain. All the welfare schemes that our central and state govt.s run are funded by the tax collections. Which as we all know is paid by a very small minority of the population.This (necessary)burden on the exchequer is sustainable to certain percentage of the GDP. however with each election the burden is being increased by desperate political parties, in search of votes. This is going to ridiculous hieghts. A case in point is the recently concluded TN elections where both the parties had promised allkind of gifts to the electorate. If these largesses are well thought of and aimed at economic stimulation, they would be welcome. But in our country the easist recourse to these irresponsible political parties is to play to the galleries. These peole are diverting economic resources for social incentives and therefore are reducing regeneration potential of the economy. Some economic measures introduced on a large scale have totally altered the economic process that it is threatening the whole economy.
Take Rajiv Gandhi Employment Generation scheme for example.It is roumoured that this is the brain child of Mr Jairam Ramesh, and was designed to keep the rural population from migrating to Urban areas. Though on the surfqace it looks like a noble idea, it is also roumoured that this was to negate the increase of the constituency for BJP and other right wing parties. Let this be a point for discussion for a later debate. Let’s look at the economic impact. Fisrt on, movement of rural population to urban areas is actually a welcome developement. For these reasons
1. Agriculture as practised by an overwhelming majority of the marginal farmers in India is a totally non profitable venture.( My family is from an agri background and still involved, so I know). Added to that, progressive division of land holdings due to succession of generations reduces the average land holding further. The only way out is for some people to move out into other areas of economic activity. These opprtunities are mostly available in urban centres. Of course there is the social concern of the living conditiions of the first generation of migrants. this, at the worst needs to be overlooked for the greater cause of longterm development. Even for them, these issues will be settled by the time of their next generation. India being a populous country we should be looking at harnessing the full potential of this asset and not consider the population as burden and spend money merely to suatain it.
2. The second and more immediate of the ill effects is the effect this programme has had on the wage economy both in the rural ana urban centres. Like I mentioned before I still have some agriculturel activity in a village in A.P and it has become very very difficult to find labour to do regular farm work. All of them either are enrolled in the aforesaid scheme where they are paid for actaully doing nothing. This is a big racket wher the officials and the labour collude to fudge records and share the spoils. I have litterally seen an old man being taken on a cot to the work site, just to mark the presence and collect his day’s pay. With this kind of cash inflow the labourer is reluctant to go to work in the fields. This has led to amny a marginal farmenr to enrol himself as a labourer himself. Sofrom a contributor to the economy he has turned into a consumer of resources. And the bigger farmers have all stopped farming.
This scheme aslo is having a detrimental efect on the urban wage market. Recently ther was programme on one of the channels about the state of textile manufacturing units in Surat. They are having acute shortage of workers as most of the migrant labour are returning to their homes as the pay from this schemes and other welfare scheme is good. This may be seen as some as redeeming development for the poor labourer. However the moot question is ‘Who is paying for all this’. -The Economy-.
Now can this be sustained. Obviously not. What are the (ill)effects.
1. Progressively the govt will have less and less money to invest in economy boosting measures and Infrastructure.
2. Once started, these schemes can only be increased but never reduced. So future earnings are also booked.
3. With increasing uncertainity on the political scene more parties are going to be increasing insecure abot their prospects and therfore indulge in more and more revenue consuming schemes.
4. Private enterprise will be hit by double whammy of increasing labour costs and increasing taxation, levied by a govt hungry for revenues.
5. Inflation will rise as agricultural and Industrial production falls.
In my opinion all the other reasons you had discussed are faced by all countries at one pint of time or the other. But this reason is self created and is going to decimate the economy.
will appreciate your comments.
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Dude no one is mentionining the possible collapse of the US Economy which is shown in the US dollar index chart. If that happens, which definitely will sooner or later then all great predictions will be left aside. Your view on this.
Hi Viral,
Very detailed reasons you have provide in favor of your point that Indian GDP growth will get slowdown in FY 2011-12. Most of the cradit rating agencies like Fitch, Crisil or Asian Development Bank (ADB) are of the same view.
Thanks for the sharing your thoughts.
khalid
Thanks Khalid… Glad to read your comment & know that it was informative to you.
“The inevitable housing collapse will happen, but when would it take place is the billion dollar question!”
It’ll take place when banks stop lending frenzy. Banks will stop lending when Indian economy is in trouble due to lot of points you have covered in this article.
I suspect it won’t happen while Indian engine is powering 8-9% growth but after that when juice is squeezed out, foreign players will look somewhere else, that’s when the Armageddon will be set upon us. It may take few years but my intuition says later part of this decade.
Yeah.. I again tend to agree with you. The inevitable would squeeze in when the going gets tough. Until then, the pressures will keep building up like a ‘pressure cooker’ and burst at a typical time when there is no exit route during the crunch period.
Good one Viral. Not sure about 2011 and not sure about all the 10 reasons above but I firmly believe that too much debt (public and private) creation is going to cause the fall of India and Asia overall one day. It seems India and rest of Asia have not learnt their lessons from what happened with western economies.
Amit,
Agreed with you. It was during 2006 and 2007 that most of the Indian companies, especially private sector companies, leveraged themselves on being carried away by optimistic environment.
Some of these companies, especially from the real-estate sector, are still fraught with high debt on their balance sheets. Though, most of the realty developers managed to raise capital through equity dilution in the post-2008 crash, their prospects are still marred by huge debt servicing costs and outstanding debt on their books.
However, before we see some of these Indian companies coming under trouble, the situation at hand is even worse in advanced western economies which is simply surviving on quantitative easing measures. Its only a matter of time before this artificial liquidity dries up and the stimulus measures ceases to exist.
Thanks for your valued comment!
Yes, real estate biggies could not get more debt from the banks as much and whenever they wanted after LIC scam. Banks are taking care before lending to real-estate players. However RBI needs to tighten the noose around the banks neck and make them scrutinise the applications well before opening any loan facilities.
The way real estate bubble has ballooned over the last 6-7 years in India, we are heading towards our own crisis in next few years. And mind you we do not have AAA ratings to still get cheap debt from the international markets as US/UK could still do. It’ll end in tears.
I’m sure there will be lot of people ridiculing this view but that’s what people do when everything is hunky dory and property prices are going up during the boom. This is exactly what happened in US and UK (I was in UK during entire last decade), I see it repeating in India.
And we have a government talking about changing the tax brackets and increasing tax exemption limits to cut the taxes on masses. It’ll only lead to more inflation and less money to service the government debt (and yes salaries of govt employees are also part of government debt which govt raised to unbearable levels with 6th pay commission).
You’ll be surprised to see the debt figures some the state governments owe e.g. Maharashtra, West Bengal.
God save India.
I quite agree with you on above view of inflated real-estate prices. The last few years were like “Oh, yes, this could well be the top” and yet we surpass it by big margins again and again. There is no respite.
In a nutshell, the realty prices have soared well beyond the pockets of aam-aadmi. A sure sign of bubble – if common people can not afford housing prices, such pricing environment can not sustain for long. The inevitable housing collapse will happen, but when would it take place is the billion dollar question!
CRAP… Improve ur understanding of Economics and the Quality of articles
Deepak,
Sure, can you please explain your school of thoughts on the economy? Would be glad to learn from you on this.
Great article and research behind it’s creation but I think you should target the topic like “10 Reasons Why Indian Economic Increase May Skyrocket in 2011.
Robinsh,
Thanks for the appreciation. Definitely, I’d have written on rosy picture of India if conditions would have warranted.
But, at this juncture, the economic determinants are such stacked that inflation and interest rates have taken a centre stage.
In fact, high inflation was no less an impact in the calender year 2010. Now that pricing pressures have carried forward to 2011 as well, it has emerged as the single most risk element for the economy which could choke growth at least in the short-term.
Talking of interest rates, we are yet to see some massive interest rates.
The money that was print post 2008 crash in the west has been flowing into Asia and has done lot worse for Asian economies i.e. inflation.
There is no going back. I’ll pray for the people who took the home loans at those one digit teaser rates that only last for 2 or 3 years.
A nice article @ Viral,
There are two views to look at present situation.
First view is our vulnerability to forign investment. Just a pull back of 1 billion dollars caused markets to crash 15%. It shows how much India degenerated since late 90s. During 96 asia melt down the whole of east asia collapsed but India was normal due to less dependence on forign investment. Or rather less dependence on forign hot money. Now we are in the hands of forign hot money just like other asian nations. Forign hot money has no long term views. Its so fluid, it moves in big volumes from nations in a way it brings down nations. Our markets can not tolerate a mere 1` billion dollar pullout in a month. That is the situation now. I remember just 3 months back there was a ht debate in financial circles to control forign hot money but our stupid finance minister was saying that we can manage the show even in worse situations. Now where is he hiding his face?
The second view is that irrespective of sudden fluctuations, Indian economy will grow due to the momentum created in massive projects.
I would like to mention three more factors here which can impact growth.
1) Scandals and effective governance : Nowadays scandals of massive proportions are happening almost on a weekly basis. It will influence forign investment in India. I am not just theorizing it. Last night I was watching BBC where forign experts were discussing the recurrence of scandals on massive scale in India. It creates negetive influence on forign long term investments. Not only govt not able to control scandals, but it itself is part of the scandals.
2) Trade balance : Though we are growing fast, our exports never beat imports since independence. We pay for our imports and we get paid for our exports. So if there is dificit in trade, we end up paying more to world trade. Where do we get money to pay for the dificit? By loans. Look at China. It always has more exports than imports. It is earning money on trade unlike India borrowing money to pay for trade.
3) Our lethergy in moving massive projects from concept stage to licence stage : In any other country it takes just months to approve any project and give all clearances. In India not only our govt agencies have no idea of big projects but also corrupt. They give licences to projects which should not be considered in first place (mining rights to relatives of ministers) and hold licences to big projects which can improve national economy (POSCO, Mittal, Jindal, Tata steel projects)
Think from point of view of investor industrialist :
When an investor with 10 billion dollars in his pocket want to invest, he will look for opportunities in few countries. He applies for licences/clearanes to invest. If India keep sleeping on giving answer, the investor will not wait at India’s doorsteps. He will look for other opportunities and move away. When you get up from sleep, start calling him to come back what he will do? Show his middle finger.
If we address the above three fundamental issues we are well off. Otherwise we will be like today, always crying about rising prices, rising petrol prices, unemployment, conflict of interests, political instability, corruption, scandals etc and etc.