AS INDIA TIDES THROUGH THE TURMOIL, HOW DO YOU PERCEIVE FUTURE PROSPECTS OF THE GREAT INDIAN STORY?

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CHALLENGES

The GDP growth (at factor price) for five years preceding 2008 averaged 9.5%, while it has reduced to 7.9% for the following period including the financial year 2011-12. The 2012-13 growth rate in following graph is a projected target. The Indian economy is facing severe challenges since the post 2008 US financial crisis. It has embarked upon a path of series of patches and bump GDP GROWTH RATE AT FACTOR COST ahead. 12 10 8 6 4 2 0

India needs to maintain a minimum of 7% GDP growth, at factor price, to employ 20 millions of new workable population every year. With the growth rate decreasing and the continuous fall in mercantile trade growth rate, there stands a large challenge ahead for the Indian policy makers to keep Indian Growth story intact. The fiscal deficit has ballooned over the last five years. Which squeezes out money from the govt. coffers therefore it has to rely on deficit financing which reduces governments ability to fund necessary expenditure.

Fiscal deficit % of GDP

12 10 8 6 4 2 0

Inflation has been unbearably high at above 9% for most of the year 2010 and 2011. The RBIs series of record monetary tightening since 2010 to the end of 2011 started smoothening the Inflation only from the start of the calendar year 2012, but at 7.23% for the month ended Apr, 2012. Its still way high above the RBIs comfort level at 5.4%. The volatility in global crude oil price coupled with rise in secular demand for vegetable, milk and other food items have been at the core of the consistent rise in inflation. The widening current account deficit has been a matter of concern at the north block. The current account deficit for the financial year ending 201011 has been at $44.3 billion, which jumped to $54 billion in the year 201112. Before the starting of the crisis in 2008, India had a surplus of current account balance.

The major challenges have been the continuous falling FII inflow in India. The FII inflow in India dropped to $14 billion in 2011-12 from $30.3 billion in 2010-11. The government hasnt been able to arrest increasing loss of confidence of foreign investors in India Story. Rupee traded against dollar at all time low in the previous week ending 18th Apr, 2012 at Rs 54 a dollar. That results into higher import bill for same quantity of goods purchased from outside country. Being a major oil importing country it is contributing in a huge balance of payment problem for the government.

THE GREAT INDIAN STORY

But thats not the end of great Indian story. The current problem is the world wide one. Before 2008 crisis we had been the front runner of growth. From 20012007 our growth had been second only to China in the major economy group. After 2008 the world economy is reeling under a series of complicated problems, which belied the prevailing macro economic theories of renowned economists world wide. No one predicted the great Lehman brothers debacle up to the last moment. Then came the sovereign debt crisis, hitherto it was presumed that a nation state cant default. That gave rise to unabated rise in debt financing over the years, which

In that case India has been able to maintain its growth rate above 7%, again second only to China, which is remarkable on the back of falling European demand. Its natural that Indian economy is facing external challenges. Moreover, Indias growth story is intact in medium to long term. Its working age average population is 23 years and over 600 millions of India are below 30 years. It will get a demographic dividend. That indicates a huge opportunity for Indian growth story. If India is able to create jobs for them, it can achieve a 9% growth rate in medium term, says economist Surjit Bhalla.

With a national saving rate of 32.3% (2010-11) and gross investment rate of 35.1% (2010-11) India has every wherewithal to jump start once the microeconomic condition of world economy stabilizes. The fall in growth rate of Indian mercantile trade can be mostly attributed to fall in demand in European countries and the volatility in the global crude oil price. It is an extended recession, which started from the US financial crisis, but within 6 months the Indian economy started sign of recovery. The second phase of recession is induced by the European crisis. There is hope that the economy will come back on the track any time, 2013 onwards. Indian economy has got a huge domestic consumer driven market economy, unlike Chinas export driven economy, which is trade dependant more than us. Our economy has capacity to meet industry requirement and thus sustain against any global set backs to a great degree of extent.

THE WAY AHEAD

The Government has not been able to bring a meaningful reform to win investor confidence during its second stint. A series of high office corruptions has paralyzed the Political headquarter in New Delhi. Some of the fundamental problems economy is facing is:The land reform. It has been Achilles heel for business persons to acquire land for infrastructural and manufacturing purposes due to the archaic land act and thus controversies arising out of land acquisition. The labour reform is the biggest problem the Indian economy is facing, which needs urgent attention. There is a unique situation in India, the educated and skilled people have hard to find jobs on the one hand and there is a huge shortage of skilled workers in the Indian economy on the other. The problem is that companies in India cant fire unproductive workers to hire the skilled one from the market so easily. The archaic practice entails labour unionism and other political sources to influence decisions in business. That results into loss in productivity.

To do business in India is tougher than even some of the South Asian tiny neighbours. To set up a business in India requires over 59 contracts to be signed and some clearances like environment and others take years to get final clearance. Posco and Vedanta group of companies have been trying to enter in India since 2006-07. They are still in process to get a final go ahead proposal. The government is reeling under more than one problems simultaneously. To expect it do anything meaningful in its present tenure is an over optimistic hope. Generally, the big reforms are done during the first three years of general election. After 2013 the government will come in election mode and any unpopular move becomes a distant proposition for a political party to take during election hours.

THEN WHAT

WAIT FOR TWO MORE YEARS.

The economist Kaushik Basu rightly said about the policy paralysis of India up to 2014. We should sit tight until then to hope that great Indian story remains intact.

BIBLIOGRAPHY

THE ECONOMIC TIMES THE FINANCIAL EXPRESS (ASIA EDITION) THE ECONOMIST CENTRAL STATISTICAL ORGANISATION

THANK YOU

Prepared by: Anand Kumar