India: Outlook for 2008-09 - Case Study Example

Summary of India Country Report, 2008 - 09 Continuing its series of country-specific reports, The Economist Intelligence Unit released its report on India, concerning the past performance and outlook for 2008-09. Such reports are being used by the companies around the world for their cross border activities, to gain authentic knowledge about the business climate in the context of political, economic and regulatory frame work of a given country. Moderate to strong GDP growth The Report reveals that the strong GDP growth rate of the past few years is likely to continue with a bit of moderation, due to factors like the appreciating rupee and the restrictions imposed by the Reserve Bank of India (RBI) to control inflation. The financial year for India is April to March, and during the first quarter of the current financial year (2007-08), real GDP growth was 9.3%, estimated growth rate for the full year being 8.4%. This is on the back of an average annual growth rate of 8.83% in the past four years since 2003 – 04. The above 8% GDP growth performance is not likely to be sustained in the coming two years, forecasts being still healthy at 7.9 % and 7.4% successively. The overall GDP is estimated to cross one trillion US dollars land mark during the current year itself, by a good margin. Sector-wise, industrial and services sectors continue to outperform while the agricultural sector growth will be anemic, as in the past few years. During 2006-07, industry and services sectors accounted for 27.9% and 54.6% of the GDP respectively, the balance 17.5% being for the primary sector in which more than 700 million people are engaged in India. Thus, the bleak outlook for the rural economy stares in the face of resurgent growth rates in industry and services sectors. This is being addressed as can be seen in the section ‘Economic Policy’ below. Trade in goods and services, with continued political support for liberalization, is showing good performance. Imports are rising due to strong domestic demand for industrial and consumer goods. However, exports which averaged 26.5% growth in the past three years are expected to slow down to 17.2% in the current year, the main culprit being the weakening of the US dollar vis-à-vis the Rupee. Rupee appreciated by over 12.5% in the past 12 months and the export oriented segments of the economy like software services, textiles, leather goods etc are hit by the Rupee appreciation. Rising cost of increased imports and crude oil are balanced somewhat by the rising exports of services along with remittances from non-residents, thus keeping the current account deficit under control, estimated at less than 2% of the GDP for 2008-09. Economic policy The policy laid emphasis on increased spending on primary health, primary education and rural infrastructure in order to achieve inclusive growth of the entire population, rural and urban. Similarly, investments in infrastructure development are significantly increased to take care of the growing economic activities. Given the strong economic performance of the past few years, government also aims to limit the fiscal deficit to 3% of the GDP in 2008-09. Inflation has been a concern in the past two years although it appears to be coming under control, with the target for whole sale prices for 2007-08 being 5% or less. Towards this end, the RBI is following a policy of steady to tight money control, managing its repo- (loans to the banks) and reverse repo- (loans from the bank) rates, and the cash reserve ratio (CRR) to be maintained by the banks. Recently, in order to reduce the money supply in the economy and thus to control inflation, it raised the CRR. It has also limited the amount of money that can be borrowed abroad, called the external commercial borrowings (ECB). For 2007-08, India’s total external debt and foreign exchange reserves are estimated at US$ 138.6 bil and US$ 236.52 bil respectively. Economic outlook A good part of India’s external trade is linked to the US and Chinese markets and it enjoys a favorable position in both markets, with exports exceeding imports. The sluggish growth rate of the US economy (1.9 to 2.7% in 2007-09) portends warnings for the world economy in general and the Indian economy in particular. India’s IT and IT enabled services are heavily dependent on the US market. The growth rates elsewhere, like in China and EU, are also steadily decreasing. The crisis in the US housing and mortgage industry is adding to the uncertainties. Thus, the Report forecasts a slowing down of the pace of economic growth in India in the coming years, due to external factors. Political situation India follows the Westminster type parliamentary democracy and its constitution was adopted in 1950. Executive power vests with the Prime Minister of the country and his cabinet colleagues. Individual states (29 no.) and union territories are a part of the federal system, enjoying considerable independence of action. The current government of the United Progressive Alliance (UPA) came into power at the center, in May 2004 and will last till May 2009, when the next elections are due. The UPA government is an alliance of like minded parties, led by the Indian National Congress – the largest party in the coalition – and supported from outside by the leftist parties. This fragile arrangement has put limitations on some of the economic and foreign policy initiatives of the Congress party, resulting in a slow down of the reforms in the economic field. The opposition of the leftist parties for the civil nuclear energy treaty with the US is a case in point, threatening the very survival of the government. Being a vibrant democracy, such contentious issues are taken care of politically. The main opposition party led by the Bharatiya Janata Party (BJP) is not significantly different from the Congress party on economic policies and liberalization. Outlook Reforms are slated to continue irrespective of which party or which coalition gains power at the center. GDP growth will moderate to about 7.5% by 2009-10. Rupee is expected to stabilize at 39 per US$, inflation at 5%, unemployment at 6.4% and current account deficit will fall to 1.7% of the GDP – all by 2009-10. India will continue to attract huge foreign direct and portfolio investments as a result of the opening of the economy and the stock markets. Reference “Country report: India 2008 – 09”, The Economist Intelligence Unit, September 2007, London. Read More