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:
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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?