Deloitte’s forecast for the Indian economy is positive with an expectation of over 8 per cent growth in the next quarter. Projections for the agriculture and allied sectors is also buoyant – an expectation that growth will surpass 2.9 per cent. This means more money in the hands of consumers, the forecast states.
The Indian economy is following a syncopated growth trajectory. The monsoon, the lack of which threatened to fuel spiraling inflation and derail economic progress just a few months ago, has now turned into a facilitator of growth. A bumper harvest will infuse the economy with the liquidity that is required to sustain the resurgence in the manufacturing sector. It is likely the economy will grow at over 8 per cent in the next three quarters.
In the initial months of the current fiscal year, Indian exports were hailed as an upbeat barometer of India’s economic performance but the latest trends indicate a slowdown. Exports had grown at about 30 percent until June, but slipped to just 13 per cent in July. The decline is a correction in the growth figures due to the removal of the base effect. Although Indian exports have recovered beginning in late 2009, due to a geographic shift in India’s destination markets towards Africa, Latin America and Asia, the sector is expected to see sluggish growth in the coming months. Furthermore, the export sector is still dependent primarily on Europe and the United States, so signs of economic weakness and double-dip recession do not bode well. Imports, however, paint a more positive story. Growth of 34.4 per cent in July indicates a strong domestic industrial demand.
Abundant rainfall during the monsoon season will in all likelihood lead to a bumper harvest of summer crops. Growth in agriculture and allied services could well surpass the 2.9% uptick posted in the first quarter and gravitate towards the government’s medium term target of 4%. A good harvest will not only ease food-price driven inflation that has been a cause of concern over the last few months, but will also release money for consumption in the economy. The consequent rise in domestic demand will likely sustain the resurgence in the manufacturing sector.
The current economic condition presents Indian policy makers with both opportunities and challenges. The upsurge in manufacturing and the expected bumper harvest will allow the government to focus on resurrecting the financial services, insurance and real estate sectors. The speed at which policymakers intervene in these areas will be key to their recovery.
Inflation could continue to be a thorn in the side of policymakers. Wholesale price inflation, although dipping below 10% in July, could rise again. While the approaching harvest will help ease supply-side bottlenecks that have thus far been the cause of inflation, the release of cash into the economy could fuel demand-side inflation, instead. In other words, core inflation or inflation less the effects of energy and food prices could rise.
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