India’s economy grew at a mere 5.3 per cent rate in the quarter ending March. For those in doubt of a deepening economic slowdown in the country, that’s a seven year-low.The economy grew 6.5 per cent in the fiscal year ending in March, a nine-year low.
India’s macro outlook is fragile and the country is trapped between inadequate policy actions and a weak global economy.
Stuck in a rut
India’s economy is caught in a vicious cycle according to Morgan Stanley’s Ridham Desai. The slowing growth is hurting government revenues and the government is inflexible on expenditure – interest and subsidies account for 90 per cent of the federal deficit and the government isn’t doing much to slash its subsidy burden and increase savings.
Higher fiscal deficits, the waning global risk appetite, declining forex reserves, tight domestic liquidity, and high interest rates are being exacerbated by the slowdown and creating a feedback loop.
The currency and deficit problem
Moreover, the Indian rupee has been taking a beating, hitting a record low of INR56.51 against the dollar and making it harder to cut the massive current account deficit.
And the sharper swings in the currency suggest that this time around, “some of the drivers are probably a little more local / India- specific than in the past,” according to Citi analyst Aditya Narain. Historically a depreciation in the rupee has been driven or accompanied by equity inflows and outflows. This time around however it has been driven by a combination of pressures from the current account deficit, oil and gold prices, concerns about India’s economic outlook and global uncertainty.
India is struggling to attract foreign investment because of slowing growth, rising inflation, and a stock market that is falling but still not cheap, and all of this has made funding the growing deficit one of the biggest problems for the economy and the currency, according to Morgan Stanley analysts Stewart Newnham and Yee Wai Chong.
In such a situation the economy risks having its current and financial accounts running a deficit which would weigh heavily on the rupee. And the country’s central bank has its hand’s tied because attempts to bolster the rupee would invariably drain liquidity from the markets.
The disappointing BRIC
Once a BRIC darling, the Indian economy riddled with corruption and fiscal mismanagement is beginning to lose its shine. In fact Jim O’Neill who coined the term BRIC has said India is the BRIC nation that has disappointed him the most.
Given the somber investment climate and weakening industrial production, HDFC analysts Sameer Narang and Vishal Modi of HDFC Bank expect GDP to grow 6.5 per cent in FY12. If the economy hopes to recover Indian lawmakers would do well to acknowledge the need for fiscal, not just monetary, change.