India sees swifter economic recovery
Thursday, January 21, 2010
| Posted by: Alex Wright
Categories:
India Watch Issue 7
| Tags: Grant Thornton,
South Asia Group,
Alex Wright,
India Economy,
India GDP
With the passing of the New Year, India can look forward to 2010 in the belief that the worst of the global financial crisis has passed and that the country remains on course for continued growth. 2009 witnessed the deepest trough of the financial crisis, and while India was not completely unaffected, with increased government and private spending and the implementation of economic stimulatory packages, it saw a much swifter recovery than most.
The full extent of India’s recovery is highlighted by the country’s GDP growth in the third quarter of the fiscal year ending March 2010 (7.9%). This has led to an increased confidence that GDP growth for the fiscal year will near 7%. While this growth in GDP is still significantly lower than the 10% growth recorded prior to the financial downturn, it compares favourably to other, specifically western, countries. If India can attain a GDP growth rate of 7% over the fiscal year 2009-2010 it would considerably reinforce its position as being one of the fastest growing economies in the world.
So, what has India done over the past 18 months to weather the financial storm better than others? To start with, India, along with the majority of the East, had significantly less, if any, exposure to the subprime market, whose collapse triggered the downturn. Additionally, due to the rather more cautious nature of the banking sector in India, its banks avoided the problems faced by Western banks with respect to their ability/willingness to lend to one another. As with a number of countries across the world, the Indian Government also had to implement various financial stimulatory packages, which, along with prudent economic management assisted greatly in India’s overcoming of the more pertinent dangers of the global economic downturn. As early as the middle of last year, the World Bank stated that India’s growth rate could surpass China’s for the first time in 2010.
However, while there may be encouraging signs, India, along with other Eastern economies still faces tough and testing times ahead. As a priority, the Indian Government must plan for when its fiscal aide packages are removed. The government has not yet set a deadline for the removal of these aids and may well do so in phases. The largest concern for the Indian Government with these packages in place is its increasing fiscal deficit, estimated to rise to 6.8% of GDP in the current fiscal year. Finance Minister Pranab Mukherjee stated that the government “needs to strike a balance between reducing the fiscal deficit and economic growth”. Mukherjee added that the current level of fiscal deficit cannot be sustained for much longer and that it must come down to around 4% of GDP by 2012. So, while India seems to have survived relatively unscathed from the immediate hit of the financial downturn, there remain numerous obstacles and pitfalls that will last well into the new decade.
Further to the above, another considerable obstacle for growth in India lies in the number of skilled workers available. The comparatively low level of school-leavers that continue into higher education has been acknowledged by Kapil Sibal, India’s human resource development minister, “After coming out of school, 63% of the United States and 50% in Europe move up to college. In India that figure is just 12%”. By 2020, through a re-examination of the educational system, Minister Sibal aims to take higher education enrolment up to 30%, ensuring that India will have a workforce skilled enough to continue its growth into the long term.
India’s ability to attract Foreign Direct Investment (FDI) is another major area for review. While the amount of FDI into India has improved substantially in recent years, the other BRIC countries (Brazil $45bn, Russia $70bn, China $108bn) are all still ahead of India ($40bn). For India to catch up, as mentioned previously in these reports, policies will have to change to allow for greater FDI, and infrastructure will also have to be improved. The government also needs to address the country’s current level of inflation, specifically food-price inflation. It should be noted, however, that the current level of inflation has been driven up dramatically by the rise in the nation’s food price following the poor monsoons. With the full extent of the country’s poor rainfall still not apparent, further food price inflation seems likely without significant intervention.
All this being said, 2010 will see continued growth for India’s economy. While its fiscal deficit may remain high in the short-medium term, vital infrastructure spending is set to continue (up to 9% of GDP by 2014). The promising growth in India’s automobile sector, which experienced solid growth in 2009 (domestic sales up: 16% and export sales up 15%), is also forecast to continue into 2010. Additionally, prudent economic reforms, employee skill development and revised bureaucratic procedures, which economists continue to highlight, will also hopefully be reviewed to encourage further growth and investment. While the majority of the world’s economies are still finding their feet following recession, India’s past economic ‘cautiousness’ has not only limited their exposure to the financial downturn but kept the country in good stead for growth and prosperity for the coming years.
Alex Wright
Executive, Capital Markets, South Asia Group
Grant Thornton UK LLP
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