Optimism about India is in the air, again. The ruling Congress-led coalition government of Prime Minister Manmohan Singh finally woke up recently to take some long-overdue remedial action to address the macro imbalances it has bred. The government has made a welcome start, and there are some signs of stabilisation and re-assembling of the growth drivers. But a lot more needs to be done if India is to get up and run again rather than just limp along. Expectations are again running high and history cautions that government actions have rarely exceeded high expectations.
The pieces of India’s macro puzzle are slowly, but unevenly, being put in place. Growth will improve slightly in 2013—not bad given the still-sobering global outlook. Fast-tracking of projects could be incrementally positive for growth at a time when export-dependent Asia will be suffering more than India from the global downshift. However, India’s macro adjustment will be protracted and a 2003-like growth take-off remains wishful thinking. Our forecast of lower commodity prices next year will be positive for inflation and allow for limited monetary easing. It is often ignored that lasting low inflation and qualitative fiscal adjustment are pre-requisites for sustained growth acceleration. We reiterate our non-consensus view that the rupee will weaken next year as India’s inflation differential will remain high.
Talk on India’s macro has been more negative than investors’ positioning. Easy global liquidity and investors’ faith in India’s long-term story ensured that the equity market has been much better off than the weak real economy. As the government heals the self-inflicted economic wounds, don’t ignore the risks. The on-going corruption-fest, high probability of early general elections, government’s hardwiring to populism and adverse capital inflows could cause a setback. Unlike the last one year, the now-awake government will, hopefully, be more constructive.
For all the global economic problems and the fallout from the local corruption scandals and policy inaction, India’s GDP growth in FY13 will still likely be around 5.5%. This is a far cry from the peak outcome of 9.6% in FY07 but should be viewed in the context of severe global and local headwinds. Still, India, given its low per-capita GDP of a mere $1,500, needs to grow much faster to generate sufficient employment to avoid social tensions. Some of the structural tailwinds, such as India’s favourable demographic and increasing consumerism, remain in place. However, others, such as the virtuous savings-investment cycle, have been damaged