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Indian economy sets targets Europe can only envy

Growth of Indian economy | Indian economy and India's GDP growth set targets Europe can only envy Anthony Harrington

With the Indian economy set to grow at an annualized rate of 10% by 2012, according to the Indian Finance Minister, Pranab Mukerjee, the Reserve Bank of India (RBI) is already taking steps to exit from the quantitative easing process it put in place at the height of the downturn. In late April the RBI increased short-term lending and borrowing rates, raising the repo and reverse repo rates to 5.25% and 3.75% respectively. It also told commercial banks to deposit 25 basis points more money with the RBI, by raising the cash reserve rate (CRR), pulling a good slice of liquidity out of the system. This move follows the RBI’s opening salvos, back in January and March 2010, when it first raised the CRR by 75 basis points and then, in March, raised the repo and reverse repo rates by 25 basis points each, as reported by The Times of India.

At the time, banks did not pass on the rate hike to borrowers as the rise was seen as something the banks could stand and there was plenty of liquidity in the system. Even following the April rise, the banks are said to be relaxed and not planning lending rate increases, at least on the consumer side. There is some feeling that corporate rates could rise, particularly where banks feel the loans have an element of “subprime” risk to them.

Agriculture and allied industries contribute some 18% to the Indian economy and the sector is very vulnerable to the way the annual monsoon season plays. In 2009 the monsoon was bad and its negative impact on the economy caused the Government to reduce its predictions for growth in 2010 from 7.2% to 6.5%, partially caused by an anticipated 2% shrinkage in the agricultural sector’s output. The IMF and World Bank predictions for India’s GDP growth rate in 2010/2011 is 8%.

Sugarcane output was knocked back some 12%, according to India’s office of national statistics, driving the price of sugar up—no small matter when one remembers that India is the world’s largest consumer of sugar. By way of contrast, the service industry is set to grow by 8.7%.

India still intends to invest some US$38.14 billion in infrastructure spend and the government has established a new body to oversee this, the India Infrastructure Finance Company Ltd.

Whereas inflation in the eurozone is running at under 2% (1.5% year on year, in April 2010), inflation in India stood at 9.9% year on year for the month of March. As part of the quantitative easing program, India’s public debt rose to more than 50% of GDP through 2009, while the unemployment rate stands at 8.4%. The fiscal deficit is currently running at 6.8% of GDP, which is a lot higher than the EU has mandated for its member countries, but not that bad for a fast growing emerging economy. India’s annual Economic Survey, cited by the Financial Times as one of India’s “most important policy documents,” and authored by a team under Kaushik Basu, the chief economic advisor to the Indian Government, has recommended that the Government should look to cap state and federal debt at no more than 68% of GDP by 2014/2015. At present, according to the FT, the combined central and state debt amounts to some 80% of GDP, which should be raising red flags for the Indian Government. The FT cites Brian Jackson, senior emerging markets analyst at the Royal Bank of Canada as saying that India appeared to be gambling on continued high growth to escape “fiscal purgatory.” Let us hope its gamble pays off.

Further reading on growth of Indian economy and the BRICs

Tags: BRIC , developing world , economic recovery , India , Reserve Bank of India
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