We stepped into 2010 with a lot of optimism about the recovery in domestic economic activity from the crisis that had marred the economic growth scenario. Although the year began on a reasonably optimistic note, the pace of economic growth was more rapid than anticipated by many economists as the year progressed. However, even as the macroeconomic numbers displayed a strong performance, they were marked by a lot of volatility; the volatility was evident not only in the numbers but also in the sentiments primarily driven by the global clues and policy responses to cater to inflation.
The recovery as witnessed in the Indian economy since the beginning of 2010 has been broad-based as evident in the strong performance of the industrial sector, the sustained increase in the agricultural sector output and the resilience exhibited by the services sector. It is expected that the pace of economic activity to take a step forward towards a high growth trajectory with GDP registering a growth at around 8.8% during 2011 as private demand gathers momentum and supports the overall growth process. The improving business and consumer sentiment, buoyant employment scenario, rising income levels both in urban and rural segment coupled with sustained recovery in the world economy are likely to fuel the consumption spending during 2011.
Disaggregating the growth data on a sectoral basis, buoyancy in the services sector is expected to support the overall growth process during 2011 while the consolidation in the industrial activity and relatively lower growth in the agricultural sector as compared to the previous year is likely to restrain the overall GDP growth. Further, improving investor confidence both domestically as well as internationally would propel the growth of financial services thereby aiding the growth in the services sector. Given the uplift in business confidence, the buoyant demand conditions and the expected continued government thrust on infrastructure projects, the industrial growth is expected to consolidate during 2011.
However, the sustainability of this high growth into the ensuing year would require the support from the key pillars of growth i.e. savings and investment. It is expected that the domestic investment and the savings growth would remain buoyant during 2011 and support the overall growth process. While execution of capital expenditure plans by domestic companies, increase in domestic savings coupled with the government’s thrust on infrastructure spending will support the investment activity during 2011; rising household income, higher corporate profitability, shrinking of the fiscal deficit on account of fiscal prudence undertaken by the Government is likely to boost the domestic savings going forward. It is expected that significant portion of investment will be met through our own saving.
While the economy is expected to continue traversing towards the high growth trajectory, inflationary pressures are emerging as major downside risks to growth going forward. However, it is expected that the inflation would moderate during 2011 as the waning low base effect plays a crucial role in bringing down the inflation numbers. Moreover, the lagged impact of the aggressive monetary tightening measures undertaken by the RBI during 2010 is also going to aid in arresting the inflationary pressures. Nevertheless, the market prices of the goods and services are expected to remain elevated. Given the fact that around 30% of the total consumption basket consists of food items, significant surge in the prices of food articles is expected to affect purchasing power of the consumer and thereby impact overall consumption demand. Further, if the upward trend as currently witnessed in the global crude oil and metal prices continues it would exert considerable upside pressures to the domestic inflation during 2011.
Given the rising concerns regarding the inflationary pressures that are likely to emanate in case of unabated surge in global oil prices and gradually building demand pressures, the RBI might consider a 25 bps hike in policy interest rates in the forthcoming monetary policy review. Expected high interest scenario during most part of 2011 not only has the potential to impact consumption demand but could also weigh on the investment demand in the long run.
While the larger and stronger domestic market has the potential to drive the economic growth in India during 2011, impact of factors such as widening current account deficit, an appreciating rupee and increased risk aversion among investors owing to uncertainty regarding the growth prospects of some of the developed countries in the world, should not be undermined.
The author is Senior Economist, Dun & Bradstreet India
