With growing signs of slowdown across sectors, persisting high inflation, and continuing governance deficit, India's economic outlook for 2011-12 has turned distinctly gloomy. The recent downgrading of the US government's credit rating by Standard and Poor's from ‘AAA' to ‘AA+' has only added to the growing uncertainty that could affect India's exports in the second half of the current fiscal.
According to Commerce Ministry officials, the 82-per cent-surge in exports, in July, and their healthy growth during April-July this year, was on account of execution of orders received well before the current crisis in the US and Europe began.
In fact, the healthy export growth also helped in the industry posting improved output during July, which is unlikely to sustain.
According to experts, exports of readymade garments, leather, gems and jewellery, in particular, are expected to be affected. If there is a second recession, it could also have an adverse impact on the IT industry.
Moreover, with inflation persisting at unacceptably high levels for a prolonged period, the Reserve Bank of India (RBI) has decided to continue with its aggressively hawkish monetary policy stance even at the risk of sacrificing some growth in the short run.
GROWTH FORECASTS
The latest data released by the Central Statistical Organisation (CSO)had pointed out that theGross Domestic Product (GDP) growth during the fourth quarter of the fiscal 2010-11 declined to 7.8 per cent — the slowest in five quarters - against 9.4 per cent in the corresponding quarter of the previous year.
Though the RBI has retained its earlier forecast of 8.0 per cent growth in its First Quarter Review of the Monetary Policy released on July 26, it has referred to certain downside risks to this growth forecast. Simultaneously, it has raised its inflation projection for March 2012 to 7 per cent, up from 6 per cent projected in its May 3 policy statement.
On July 31, the Prime Minister's Economic Advisory Council (PMEAC) has toned down its 2011-12 growth forecast to 8.2 per cent from the earlier 9.0 per cent. The PMEAC said that the lower growth during the current fiscal would primarily be on account of industry, which it now forecasts to grow at 7.1 per cent .
Investment slowdown
Going by the various economic indicators however, even these lowered growth forecasts by the RBI and the PMEAC now appear somewhat optimistic. For instance, there has been a significant slowdown in new investments and gross fixed capital formation during the quarter ended January-March 2011, and the outlook for the current fiscal appears all the more uncertain as companies have been postponing their investment decisions.
According to Mr Pronab Sen, Principal Advisor, Planning Commission, the investment slowdown had started much earlier and it had declined by nearly four per cent of GDP in 2009-10; it declined rather sharply in the later period. Though the demand in the economy is artificially propped up, new capacity creation in the industrial sector has almost come to a halt.
India's Purchasing Managers' Index (PMI) has declined to 53.6 in July this year from 58 in April — its lowest level in the last 20 months, with indications that it could come down further. This is also the lowest level for the index after the last global financial crisis, two leading foreign broking houses — Citigroup and Nomura - have pointed out, in their latest report on the state of the Indian economy.
To add to the worry of policymakers, the monsoon forecast has also turned gloomy, with the Met department forecasting below normal rainfall in the second half of the season. This is bound to bring down the growth of the agriculture sector significantly, at a time when food inflation continues to remain stubbornly high.
And not surprisingly, US investment bank Morgan Stanley has reduced its growth forecast for the Indian economy for the fiscal ending March 2012 to 7.2 per cent from 7.7 per cent. It says India is headed for its worst period since the global financial crisis. Many economists also feel that the GDP growth this year may not exceed 7.5 per cent.
RBI'S PREDICAMENT
Unfortunately, the RBI has been fighting a lone battle against inflation for more than a year without any help from the government, either by way of reining in the burgeoning fiscal and revenue deficits or by improving the supply management.
The country has been witnessing a growing governance deficit at all levels and the much-needed reform process remains stalled.
The RBI has emphasised the need to address the supply side bottlenecks, especially in food and infrastructure, to bring down inflation. However, the entire governmental machinery appears bogged down in damage-control exercises following a spate of corruption scandals. There is also a total absence of co-ordination between different ministries.
The PMEAC has also added that the spate of corruption-related controversies during the past one year consumed the energies of the government and led to an unintended slowdown of initiatives to restore investment and economic confidence.
The latest Anna Hazare episode and the public uprising all across the country will only add to the policy paralysis afflicting the government.