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The Indian economy will face an uphill battle in 2012. During the second half of 2011, a variety of factors, including monetary tightening, rupee depreciation and continued turmoil in the Eurozone, fueled anxiety about India’s macroeconomic and industrial outlook for 2012. GDP growth dropped to 6.9 percent in the quarter ending in September 2011, registering the slowest year-on-year increase in the past two years.
Policymakers’ approach of pushing for growth with less focus on the productive dynamic has translated into increased signs of macro stability risks emerging in the form of higher inflation, fiscal deficit and current account deficit.
Sustaining high growth is likely to be the overarching concern in 2012, although the risk of inflation will remain, largely because of a weakening rupee.
In this report, we present ideas that can help businesses in India and elsewhere prepare for the new realities of India’s changing macroeconomic and business environment. We recognize that the most successful businesses will invest in immediate priorities without losing sight of tomorrow. As always, we offer these ideas as starting points for lively dialogue about new business directions.
A weak fiscal situation could pull down growth
The twin deficits (fiscal and current account deficits) account for close to 9 percent of GDP. (Adding the state governments’ deficits would take the combined deficit past the double-digit mark.) Under these conditions, the danger of crowding out investors is all too real.
Higher government borrowing is also putting upward pressure on sovereign bond yields increasing the cost of financing government borrowing. In addition, the adverse fiscal situation is hurting the government’s ability to finance its flagship developmental initiatives, which pumped up demand in rural areas during the 2008 global recession.
Managing inflation will help India pursue its inclusive growth agenda
We expect inflation to ease only gradually in the year ahead as demand-supply imbalances persist. High inflation has started taking its toll on consumption demand in India, with sectors such as consumer durables, automotive and fast-moving consumer goods (FMCG) experiencing a growth slowdown. High prices coupled with high interest rates, on the back of monetary tightening, are forcing families to cut back on spending, leading to sluggish revenue growth across sectors.
Measured trade liberalization necessary to stabilize India’s long-term growth agenda
In a year of depressed export growth, a more measured approach—one guided by business—will be critical to ensuring that further trade liberalization—including ongoing FTA negotiations with the EU and China—do not result in import competition that substantially threatens Indian businesses capacity to tap into domestic growth.
Revival of investment will hinge on the government’s ability to deliver reforms
The government needs to take accelerated steps to revive investments to return the economy on a high-growth path. The recently announced National Manufacturing Policy will set the stage for future investment and growth. Another major reform initiative pertains to the recently released draft of the New Land Acquisition Act, which aims to improve transparency in acquisition, particularly in rural areas.
Labor reform is another area calling for attention. Several instances of wage-related worker unrest that erupted in 2011, particularly in the automotive and mining sectors, eroded production and growth.
An energy crisis could choke growth
Curbing energy prices and India’s dependence on energy imports requires policy support and reform to address the country’s supply-side energy shortcomings. To this end, the government needs to accelerate the overhaul in the country’s energy distribution infrastructure with investment in technologies such as the smart grids while supporting the expansion of new alternative energy sources.
Among large economies, India’s potential to bounce back remains undisputed. With a clear demographic advantage, increasing disposable income, an expanding middle class and large pools of untapped demand in rural markets, India’s domestic consumption will likely fuel the nation’s economic growth for years.
Nevertheless, policy support would help to sustain faith in this growth opportunity. Reforms in key sectors such as retail and insurance must be implemented quickly to attract investment. As India drafts its next Five Year Plan in 2012, it will have a unique opportunity to outline an agenda for inclusive growth and effective governance that can help rebuild trust among its citizens.
For Indian businesses, 2012 will be the year to explore new strategies for boosting efficiency and stimulating growth. Companies will need to find fresh ways to cut costs, improve productivity and manage risks to internalize the impact of inflation, rising interest rate and rupee volatility. They must also remember the demand side is also showing signs of fatigue.
Read the 2012 Sector Outlooks for:
Automotive, Banking, Chemicals, Defense, Education,
Fast-Moving Consumer Goods, Healthcare, Information Technology, Infrastructure, Media and Entertainment, Oil and Gas, Pharmaceuticals, Power, Real Estate, Retail, and Telecommunications.
By Raghav Narsalay, Mamta Kapur, Ryan Coffey, Aarohi Sen and Smriti Mathur.
February 3, 2012
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