Thursday, May 17, 2012

The shattering of India Growth Story:

Until a few years ago, many investors were betting on the India Growth story and was hailed as one of the fastest growing emerging economies. In 2012, has something really gone wrong? Look at the dozen facts below:

1) In April 2012, credit rating agency S& P downgrades outlook on long term sovereign debt ratings from stable to negative. In its report, S&P also stated that the outlook has been revised “to reflect at least a one-in-three likelihood of a downgrade if the external position continues to deteriorate, growth prospects diminish, or progress on fiscal reforms remains slow”.
2) The annual rate of inflation, based on monthly WPI, stood at 7.23% (Provisional) for the month of April, 2012 (over April, 2011) as compared to 6.89% (Provisional) for the previous month and 9.74% during the corresponding month of the previous year. Build up inflation in the financial year so far was 2.07% compared to a build up of 1.74% in the corresponding period of the previous year.
3) The Indian Rupee crashes to a historic low of 54.76 against US dollar inspite of RBI’s intervention.

4)India equity market remains weak: In 2012, already Initial Public Offerings (IPOs) called off.. The probable amount that these 17 IPOs were planning to raise was to an aggregate of Rs 5,928 Crores, according to Jagannadham Thunuguntla, Head of Research, SMC Global.
All in all, 50 IPOs didn’t materialize during the period between 1st January 2011 till date. The aggregate that these IPOs expected to raise was about Rs 40,326 Crores. 8. This surely will impact the Indian corporates ability in fund raising to finance their expansion projects resulting in slow down in capacity building and job creation, Thunuguntla added.

5) A third of private equity ( PE) investments in India will give negative returns: 300 funds having $20 bn of unutilized money.
6) Multi-crore 2 G spectrum and mining scams create concerns on regulatory mechanisms for industry in the country.

7) Volume of trading in India’s commodity futures exchanges falls 10.99 in April 2012 on a year-on-year basis to Rs 11,52, 471.83 cr as against Rs 12,94,831.92 cr in April 2011.
8) During Q3 of 2011-12, India’s BoP came under stress as trade deficit widened, while capital inflows fell far short of financing requirements resulting in a significant drawdown of foreign exchange reserves (Reserve Bank of India(RBI))

9)Export growth decelerated in October-December 2011 owing to economic sluggishness, particularly in advanced economies. Imports continued to rise largely due to high international commodity prices and inelastic demand for gold and silver. As a result, trade deficit rose little over 50 per cent (Y-o-Y). Source: RBI

10) The Union Budget 2012-13 indicates a favourable macroeconomic outlook in terms of real GDP growth (7.6 per cent), inflation scenario (6.4 per cent) and expected moderation in current account deficit.

11) The fiscal outcome in terms of revised estimates (RE) for 2011-12 turned out to be worse than budgeted. The Central Government’s gross fiscal deficit (GFD) and revenue deficit (RD), as ratios to GDP, were higher at 5.9 per cent and 4.4 per cent, respectively, in 2011-12 (RE) over the budgeted estimates of 4.6 per cent and 3.4 per cent for the same year, reflecting the impact of higher non-plan revenue expenditure, lower revenue receipts and the downward revision in GDP (RBI.)

12)India's BSE Sensex remains in a tight range of 15000-17000 levels with no short term triggers in sight.

Government Response
Government is taking a number of measures with a view to reducing the current account deficit, improving growth prospects of the economy, and reducing the fiscal deficit. The measures being taken include steps to restrict the expenditure on central subsidies to under 2% of GDP in 2012-13 and to further bring it down to 1.75% of GDP in the next three years. In addition, Government has made a determined attempt to come back to the path of fiscal consolidation by reducing the budgeted fiscal deficit to 5.1% of GDP in BE 2012-13 from 5.9% of GDP in RE 2011-12.


- Umesh Shanmugam

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