Last Thursday, the government released data showing 17.6 per cent growth in the country’s industrial output in April — the strongest in 20 years. The numbers surprised many, including Finance Minister Pranab Mukherjee, who had seen India’s economy taking at least two years to regain the momentum it had before the world economy plunged into a recession in late 2008.
It now appears that the good times may be returning faster than expected, although spiralling inflation and uncertainties stemming from the European crisis remain a concern.
Rain gods smile. 3G windfall
The surge in factory output is one among several factors that have surfaced in recent weeks, suggesting a faster return for India to the high-growth trajectory.
The meteorological department has predicted “near-normal” rainfall this year, which will give farmers a much-needed boost after last year’s monsoon failure — the worst in 23 years — that caused a contraction in agricultural output.
Prospects of normal rain and a good crop could help cool food prices, which have seen a significant spike over the past year.
On the other hand, the upturn in crude prices –– that many feared would complicate the task for policy makers trying to douse the inflation fire –– may be capped as demand weakens on the back of the crisis in the Euro zone. Crude prices are hovering around $74 a barrel, much lower than the $130-per-barrel price before the onset of the global financial crisis.
A moderation in the inflation rate is necessary to sustain the upbeat mood of India Inc., which has not only reported encouraging quarterly results in the past two months, but also resumed investment spending that was put on hold because of the global crisis.
This past week, the country’s largest telecom company Bharti Airtel sealed a $10.7-billion (Rs 50,800-crore) deal to acquire the Africa business of Kuwait-based Zain Telecom.
And the recent auction of 3-G spectrum and broadband fetched the government about Rs 1.1 lakh crore –– three times more than expected and enough to wipe off a quarter of the deficit in the budget for this year.
These are signs that business confidence has turned around.
“We are definitely on track to touch 9 per cent growth,” said Chandrajit Banerji, director general of the Confederation of Indian Industry.
After a brisk 9 per cent annual growth for four straight years, the expansion of the Indian economy slowed sharply to 6.7 per cent in 2008-09. In 2009-10, the estimated growth was 7.4 per cent.
“Industry is running at full capacity and there is demand. We are also seeing additional investment come in, which will spur the industrial production even further in the coming months,” Banerji said. “There is a lot of buoyancy. Business confidence is very strong.”
A survey by job portal Naukri.com showed that hiring activity has moved up across all sectors and is back to pre–2008 levels.
Euro crisis. Base effects
The crisis in the European Union which began in Greece, with a threat of a possible default in sovereign debt and then spilled over to other member nations, has the potential of dragging down India’s growth.
“The adverse impact on global demand will affect exports,” said Shashank Bhide, a senior fellow at the National Council for Applied Economic Research, a New Delhi-based research body.
The EU is India’s largest trading partner and any slackening of consumption demand in Europe will hurt Indian exports.
Exports have been picking up since November 2009, but the losses suffered previously because of a year-long recession in the advanced economies of the United States and Europe have yet to be cut.
Also, judging the growth from the industrial production numbers for April can be misleading.
Year-on-year growth will moderate from June as the base effects kick in.
The wholesale price-based inflation rate touched a worrying 9.9 per cent in March. More worrisome is the spike in food prices, which bear the risk of political and social backlash.
The spike in inflation has already pushed the RBI to change its stance of softening interest rates. According to RBI Governor D. Subbarao, “the task has shifted from managing the crisis to managing the recovery”.
Analysts predict that the central bank will increase its benchmark lending rates by at least half a percentage point in its quarterly credit policy announcement next month. Hardening interest rates could be a deterrent to companies looking to revive investment plans shelved earlier.
The threat of global inflation in commodity prices reaching domestic shores remains.
“With China continuing to grow rapidly, there is demand pressure coming independently from there, and this will eventually affect commodity prices,” said Bhide.