Publication: India Economic Update, March 2012
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2012-03
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2012-03
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In 2011, India's economic growth has slowed to below 7 percent and the stock markets mirrored the weakening economic conditions, but recovered somewhat in early 2012. Industrial sector output growth briefly slipped into negative territory. On the demand side, fixed investment and consumption growth slowed. India's exports were growing very strongly through 2011 despite the worsening economic conditions in Europe, which continued to be India's most important export market. The balance of payments continued to be in surplus during April-September 2011, but the Reserve Bank of India (RBI) reserves declined by a small amount since then. The rupee nevertheless depreciated by 20 percent between August and December, before recovering somewhat in early 2012. Macroeconomic policies presented a mixed picture: the central government is likely to miss the ambitious target for fiscal consolidation it had set in the FY2011-12 budget by about one percent of Gross Domestic Product (GDP). Slippages are due to lower-than-expected revenues and increasing outlays on subsidies, which had been given low budgetary allocations in anticipation of strong policy changes, which failed to materialize. In India, the slowdown in GDP growth witnessed over the last two quarters is likely to extend into the coming fiscal year because of the weakness in investment. In FY2011-12 and FY2012-13, GDP growth is forecast to reach around 7-7.5 percent, a significant slowdown from the 9-10 percent growth in the run-up to the global financial crisis. The slowdown is at least partly caused by structural problems (power projects facing delays due to the lack of coal and gas feedstock, mining and the telecom sectors hit by corruption scandals, unavailability of land and infrastructure).
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“World Bank. 2012. India Economic Update, March 2012. © World Bank. http://hdl.handle.net/10986/27071 License: CC BY 3.0 IGO.”
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The current account deficit reached a record 4.2 percent of GDP in FY2011-12, because of decelerating export growth and high crude prices. Merchandise exports grew by 41 percent in September 2011, but their growth slowed to 2 percent by August 2012 (measured as 12-months cumulative exports compared with the same 12 months of the previous year). Inflation reached 7.6 percent in August 2012. This represents a marked slowdown since September 2011, but there has been an uptick in food prices in recent months. Also, higher domestic prices for fuel, which are necessary to rein in spending on subsidies, will contribute to inflationary pressure. Inflation is therefore expected to reach 8 percent at end-March 2013. Real GDP growth is forecast to reach around 6.0 percent in FY2012-13, after 5.3 percent growth Q4 of FY2011-12 and 5.5 percent growth in Q1 of FY2012-13. The slowdown is at least partly caused by structural problems. These include power shortages, which are partly caused by the financial difficulties facing the electricity sector as discussed in the special topic section of this update, the corruption scandals that have hit the mining and telecom sectors, investor uncertainty because of pending changes in legislation (mining, taxes, land acquisition), and the tightening constraints of land and infrastructure. Tighter macroeconomic policies, slow growth in the core Organization for Economic Co-operation and Development (OECD) countries, and worries about another global recession also weigh on growth. Important signals to revive domestic growth drivers to lift sentiment more than produce instant efficiency gains could come from reforms recently announced and, more importantly, the reform of direct taxes, the implementation of the long-delayed Goods and Services Tax (GST), and passage of the land acquisition and mining bills. This update also looks closely at two important topics for medium- and long-term growth, namely India's Right to Education (RTE) Act, which aims to shape elementary education, and the financial difficulties in the Indian power sector.Publication India Development Update, October 2013(Washington, DC, 2013-10)Although the recent market turmoil has been driven primarily by external factors, it has magnified India's macroeconomic vulnerabilities. India was just one of a large number of emerging market economies whose currency and capital account were adversely affected by a large outflow of portfolio investment this summer. The current downturn presents an opportunity to push ahead with critical reforms. The current situation is unlikely to place an insurmountable stress on the economy, but it does offer an opportunity for measures to strengthen the business environment, attract more Foreign Direct Investment (FDI), and increase productivity. The rupee depreciated sharply in May-August 2013, mainly caused by market fears of an early end to the Federal Reserve's stimulus program. As global investors shifted funds into US treasuries, the May-August fall in the rupee closely mirrored movements in other emerging market currencies and US T-bonds. The current account deficit moderated and exports performance improved. After reaching a record high of 6.5 percent of Gross Domestic Product (GDP) in the third quarter FY2013, the current account deficit improved to 3.6 percent of GDP in the fourth quarter. The decline in poverty has accelerated, but vulnerability remains high. Between 2005 and 2012, India lifted 137 million people out of poverty and reduced the poverty headcount (at the national poverty line) to 22 percent of the population. The depreciation in the rupee is unlikely to have major adverse effects and provides an opportunity to accelerate growth through further progress on the reform agenda. 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