Stage set for a better growth

Wed, 8 Feb Pre-Open

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We do not think that anyone would be surprised to know that the Indian economy is going to report 6.9% growth for the current fiscal year 2011-12. This is the number estimated by the Central Statistical Office, a government body responsible for coordination of statistical activities in the country and maintaining statistical standards. The data is somewhat in-line with the general expectation as most of the people are looking at a number around 7%. However, what is surprising in the estimation was the projected growth in the agricultural output. Considering two good harvests and close to 7% growth in the first half of the year itself, 2.5% growth projection for the agricultural sector for the full year looks like a conservative estimate.

Well, there are several obvious reasons for the projected slower growth in GDP as compared to the last fiscal year 2010-11. Higher interest rates, stubborn inflation, policy paralysis, lower business confidence and lack of infrastructure were the main causes for the slower growth. Also, prevailing uncertainty in the global economic environment added to the woes and hurt the exports. In addition, slowdown in the investment activities led the growth rate to sub 7% level.

Is 7% number all bad We definitely do not think so. No doubt, the number looks dismal compared to the 9-10% growth expected from the Indian economy, especially when it logged these rates in the years before the global financial crisis. However, looking at the performance of other large economies and gloomy economic conditions around the world, it is not that bad. Especially when infrastructure in the country continues to remain poor. However, in our view, the Indian economy definitely has the potential to perform better going forward.

And the good news is that stage is getting set for the ensuing fiscal 2012-13. It starts with the inflation numbers which shows that inflation is easing out now. Then, the encouraging policy actions taken by the Reserve Bank of India (RBI). Recently, RBI cut the cash reserve ratio (CRR) by 0.5% and eased some liquidity in the system. The budget is also expected to announce some positives on the reform front. Business confidence is coming back which is truly reflected in the surge in investments made in the Indian economy by foreign investors. However, the debt crisis in Europe and rising debt and recession in the US means that conditions in the developed world are likely to remain subdued for some more time.

However, these are near term concerns and the Indian growth story still remains intact from a long term perspective. Moreover, if the government focuses on improving infrastructure in the country, there is no reason why the country should not achieve higher growth rate on a sustainable basis in the longer term.