India Faces Fresh Challenges, Says Rolf Muller

Online, August 1, 2013 (Newswire.com) - The challenges to India's growth appear to be overwhelmingly bigger than the opportunities. While old challenges persist, new challenges are coming to the fore. Data released in FY 2013-14 saw a few record-high and record-low figures, unfortunately all indicating a deteriorating economic scenario.

After a disappointing growth of 5 percent in calendar year 2012, the lowest growth reported in a decade, 2013 started with a weak recovery of 4.8 percent year over year in Q1 2013 compared to Q4 2012, primarily due to weak domestic demand. The fiscal drag, owing to the expenditure reforms initiated in September 2012, contributed the most to the fall in domestic demand over the past two quarters. Private consumption expenditure and capital formation too registered a decline due to poor sentiments, high cost of financing, infrastructure bottlenecks, and weak domestic and global demand.

The Emerging Challenges

"India has been facing some new challenges lately, one of them being the reversal of capital inflows. Lower-than-expected growth, macroeconomic imbalances that include a record-high current-account deficit, poor investment conditions and corporate earnings, and a volatile currency have led to this reversal," said Simon Adams, Senior Portfolio Manager at Rolf Muller in Liechtenstein. "The market expectation of an improvement in the US economy and the hint of a possible reversal of monetary stimulus measures by the US Federal Reserve from this year have also contributed to the pace of the capital inflow reversal."

Another concern has been the steep currency depreciation in the past couple of months-in particular, the risk it poses to the current-account deficit. The currency depreciated by more than 14% against the US dollar in 2012. In the past two months, the currency has weakened by 13%, with the Indian rupee touching an all-time-record low of 60.71 against the dollar at the end of June due to heavy capital outflows and month-end dollar demand from importers.

"Not all has been bad though, as some of the latest economic data point to better-than-expected performance," added Mr. Adams. "There has been some respite in inflation in the past few months due to a fall in food and international crude oil prices. The wholesale price inflation has come down from 7.3 % in February to 4.7% in May, while in April consumer price inflation fell below 10 % for the first time in 2013."

Short-term risks to global financial stability have come down considerably compared to the past year. However, the uncertainty in the international environment still remains. The need of the hour is to strengthen domestic demand by boosting investment in the economy. This in turn will likely help improve the labour market and consumer confidence. At the same time, the efficiency of the Indian banking system has to be improved, with a focus on managing systemic risks to banks emanating from the external environment as well as recent domestic macroeconomic risks.

"Challenges will keep coming as the economy gets more integrated with the rest of the world. It is difficult to predict the uncertainties with certainty. The only hope is to explore alternatives within and be prepared to face the unexpected," said Mr. Adams.