The fiscal year 2011 witnessed a faster and broader recovery in the Indian economy. While real GDP was expected to gather significant momentum during FY11, the robust growth of 8.9% during H1 FY11 was a positive surprise. While the long-term growth prospects of the economy seem bright given the strong fundamentals of the economy, the short-term outlook needs to be assessed in context of the emerging macroeconomic dynamics that might support or limit India’s economic growth. Therefore, before looking at the outlook of the Indian economy during FY12, analysing current macroeconomic developments is crucial in determining the prospect of the Indian economy over the span of next one year.
It is important to note here that after nearing the pre-crisis growth levels of near 9.0% during H1 FY11, the GDP growth moderated to 8.2% during Q3 FY11. In fact, the robust growth of 8.9% in the agriculture sector aided the GDP growth to remain above 8.0%. A normal agriculture sector growth of around 3.5-3.6% would have pulled down the GDP growth to just above 7.0% during Q3 FY11, thereby highlighting the slowdown in the overall economic activity. Another important development in the recent past has been the moderating investment activity evident in relatively lower growth in Gross Fixed Capital Formation (GFCF) during Q3 FY11 and slowdown in IIP for capital goods during Dec 10 - Jan 11. Thus, the momentum of investment, which largely will be influenced by the inflation and interest rates scenario, will be crucial for determining the growth outlook for the next fiscal. Domestic demand, however, will continue to hold the key to broad based growth. The high current account deficit (CAD) is another major emerging concern, given that any unabated rise in CAD will not only put pressure on the rupee but also might put strain on India’s ratings thereby increasing the cost of external borrowing for the Indian corporates. With generalisation of inflationary pressures thanks to the recent spike in the oil prices and improving demand conditions, inflation is expected to affect the economic growth slightly especially in the first half of FY12.
Against the backdrop of heightened uncertainty on the global economic front, high interest rates scenario in domestic market and elevated level of crude oil prices in international market providing upward pressure to the persistent inflation, economy is likely to grow by 8.8% during FY12, gaining traction especially, during the second half of the fiscal year. Improvement in private domestic demand conditions, expected moderation in inflation after Jul-11 and anticipation of recovery gathering pace in the global economy during the second half of the fiscal year is expected to provide the required impetus to overall growth. However, a host of factors like high interest rate scenario, high input prices and muted investment activity along with the heightened uncertainties in the international economic scenario are likely to limit the GDP growth in the first half of FY12. With moderating inflation, anticipated improvement in domestic demand conditions and expected return of normalcy in the global landscape, domestic economic activity is expected to gain traction in the second half and the GDP growth is expected to revert to its near 9.0% growth trajectory during the second half of FY12.
On the consumption front, private final consumption expenditure is expected to grow by around 8.3% during FY12. The factors like improving consumer sentiment, likely moderation in inflation, the anticipated increase in NREGA wages, optimistic employment scenario and rising disposable income levels are expected to contribute significantly to the growth of consumption in India.
On the policy front, timely and aggressive policy responses by the RBI and the Government have aided the growth process so far, but certain upside risks such as surge in the domestic international prices, high current account deficit, uncertainty over the pace of recovery in certain advanced countries, volatility in the short term foreign funds inflows coupled with moderation in the FDI’s might create problem in policy formulation in near future.
The author is Senior Economist, Dun & Bradstreet India
