The year 2011 has been a pretty unpredictable year. No one knew at the beginning of 2011 that the GDP growth would come down to 6.9 per cent in the second quarter. No one could also predict the scale and intensity of the eurozone crisis. Many external factors plus some domestic policies have led to the slowdown of India's GDP growth and even the Finance Minister has now conceded that growth may remain around 7 per cent in 2012.
To everyone's dismay, industrial growth shrank in November 2011 by 5 per cent. Most agree that industrial growth has shrunk due to falling investment which can be attributed to the RBI's monetary policy of hiking interest rates 13 times to keep inflation down. Maybe the RBI, like the central bank of China,, will lower interest rates in 2012. The central banks of all the emerging market economies as well as the European Central Bank are going for easing the liquidity situation in the market for reviving investment and demand.
Inflation may also cool off as world commodity prices climb down due to falling demand. The only sector that may grow as before is the service sector. In fact, the service sector has performed well despite the eurozone crisis. In the second quarter of the current fiscal year, the service sector registered a healthy growth of 9.3 per cent.
Food inflation could rise again if agricultural growth does not pick up in 2012. Agricultural growth was below the targeted rate and was 3.9 per cent in 2011. The underperformance of agriculture has to be addressed with proper storage and food processing units in every village. While it is true that if Walmart or other supermarket giants had been allowed they would have invested in storage facilities first but it would take time for the entire cold chain to get moving. Indian supermarket giants should be encouraged to do the same in 2012.
Unfortunately, India has been caught in the capital flow reversals that are taking place all over the emerging market countries. Investors from industrialised countries are betting more on other developed countries' stock markets for stability than the riskier emerging markets. As a result of the dollar outflow from the Indian stock markets, the rupee has fallen sharply.
Meanwhile, escalated demand for dollars by importers and delays in bringing back dollars by exporters have brought the rupee's value down further. If the rupee continues to be low against the dollar for a while, another petro price hike could be in the offing. India being a net importer of goods and services will lose more than gain through the rupee's fall. Exporters would have gained but unfortunately, India's trade with the EU and the US is at a low point. Perhaps it would help Indian exports in Asian countries as it will enhance the competitiveness of Indian goods.
The fiscal deficit will overshoot the target this fiscal year because of the low revenue collection (since businesses are going through a downturn) and government expenditure has already exceeded 75 per cent of the budgeted target in October 2011. The fiscal deficit instead of being 4.6 per cent of the GDP could be around 5.5 per cent.
Greater inflows of foreign capital would have helped fund the next year's expenditure but in the next one year, FDI inflows are not going to increase much given the state of indebtedness in the EU countries and problems in the US economy. A high fiscal deficit combined with a high current account deficit due to continued capital outflows and low export growth will be discouraging for foreign investment.
While many may wish, including the government, that this downward trend in economic growth is but an aberration and soon growth will revive to its former 8 to 9 per cent, it may or may not happen in 2012. A lot will depend on the speed at which the EU and the US recover and raise their demand for goods and services. It will also depend on how the government comes out of the policy deadlock regarding various clearances that the industry requires for starting projects. The uncertain environment today is bad for business and many Indian businesses have expressed their desire to move their activities abroad because of the hassles involved of doing business in India. Encouraging Indian industrialists to undertake their business activities at home would be important in 2012.
India's savings rate is still high and domestic demand could remain a key driver of growth. Many of the consumer durable industries like cars and white goods industries are dependent on domestic demand for growth.
Consumption demand, however, from the private sector has been slowing down in recent months. Private consumption expenditure growth was moderate at 5.9 per cent in the second quarter from 9 per cent one year ago. Credit growth has remained moderate at around 18 per cent. The government demand has also contracted. India will have to be more dependent on other trading blocs than the US and the EU in the future for maintaining the export momentum.
In all, for India to have lower GDP growth will mean a slowdown in the manufacturing sector which is the biggest employer of unskilled labour. Only the service sector will be able to provide jobs which means only educated youth will get employed. There could be a rise in unemployment as a result of slow growth with joblessness increasing to over 10 per cent.
In the slowdown scenario, it would be important for the government to protect the poor against job losses, ill-health, lack of skills and homelessness. The food security Bill is a laudable move. The health sector reforms have to be carried forward in 2012 because unless ordinary people have an access to timely medical care, there would be problems in future regarding the availability of cheap and reliable labour.
Similarly, other human development indicators have to be improved, especially the quality of education and the reduction of malnourishment among children. India could get stuck at a lower rate of growth because of the hurdles posed by inadequate human development. Next year should be the year of greater investment in human capital and efforts to strengthen the domestic economy.
It would also be important to start off some of the big infrastructure projects which will absorb many of the unemployed. Infrastructure will require big funds which can be raised abroad through loans. Moody's recent upgrade of Indian bonds is a good sign and it also endorses the view that India may be going through a slowdown but it is still an important emerging market.
(The writer is a Senior Fellow at Observer Research Foundation)
Courtesy: The Tribune
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