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Outlook India 2006

The current growth momentum in India is not just a gift of the cyclical upturn ? it also reflects the buoyancy unleashed by structural changes in the economy, writes Kumar Mangalam Birla.

india Updated: Jan 01, 2006 01:01 IST

For anyone who believes in the law of averages or the notion that whatever goes up must come down, it may well appear that the prospects for 2006 will not be as bright as they were in the last year. After all, world economy grew at 4 per cent-plus for the second consecutive year in 2005 — the only such instance since late seventies. Significantly, the biggest contribution to global growth came from Asia; this is a trend that is likely to continue in the coming years. The Indian economy has grown at nearly 8 per cent in 2005, which is a rare feat considering that agricultural growth was quite ordinary.

But I do believe that the law of averages can take a break in 2006, at least for the Indian economy. The current growth momentum is not just a gift of the cyclical upturn but it reflects the buoyancy unleashed by structural changes in the economy. Witness the rising number of Indian companies with global ambitions, increasing number of Indian facilities offering world-class products at competitive prices and soaring confidence in India of people within and outside. Many global giants lined up investment plans for India last year and foreign institutional investors (FIIs) expressed their confidence in India’s growth story with inflows of $ 9.7 billion on top of an already record $ 9.2 billion in 2004. One of the most telling trends of last year was that news of 8 per cent GDP growth stopped surprising us in India.

The competitiveness-led buoyancy would continue and consolidate further in 2006. Even if one grants the possibility of some cyclical correction in the global growth momentum or the consumer demand, there is likely to be a compensatory force in the form of investment demand. Capex activity is clearly on the rise, which is targeting not just domestic but also export demand. No doubt, with such robust investment activity, it is now going to be increasingly difficult to keep interest rates low. This could have some implications for the financial performance of companies or to home buyers, but need not derail the growth momentum.

While housing demand and roads construction activity have been the main triggers for growth during 2004-05, for the coming year the growth momentum may come from special economic zones, retail revolution and rural infrastructure push through Bharat Nirman. Another promising area for the coming year should be the textiles sector, which had its first quota-free year and needs to consolidate its position now to leverage the two-year window until China removes export restraints.

The new year will also see progress on India’s reforms agenda. Going by the recent developments, opening up of the retail sector and selective disinvestment seem to be on the cards.

There are, of course, a couple of risks to the overall positive economic outlook. First and foremost is the risk of infrastructure bottlenecks putting their brakes on the growth momentum. Because of a combination of domestic output gaps and international price trends, both cost and availability of crucial energy inputs have already become a concern. Our exporters are also constrained while servicing global markets in a timely manner due to port congestion. As the growing economy makes increasing demands on infrastructure inputs, these problems could worsen in the coming year. Therefore, addressing infrastructure gaps needs to be our topmost priority next year.

The second risk lies in the global macroeconomic imbalances, reflected in the twin deficits of the US and rising surpluses of Asia. The longer these imbalances have persisted, the greater has become the risk of a disruptive correction. The need for prudent risk management practices is, therefore, even more acute in 2006 even as we pursue boldly our growth ambitions.

On the whole, 2006 should be a year of continued growth momentum with more and more investment plans moving from the drawing boards to the ground. It will be a year that reinforces India’s position as the rising star of the world economy.

(The writer is Chairman of the Aditya Birla Group)

First Published: Jan 01, 2006 01:01 IST