While it may seem it is the government?s job to talk up the economy and the markets, Dr Rangarajan?s GDP growth estimate of 7.5-8% for 2012-13 is way too optimistic. As for the chairman of the PMEAC?s view, that capital flows will be back in the first three months of calendar 2012, even the most diehard of India bulls don?t see that happening.
To begin with, most economists say the Indian economy will clock a slower pace of growth next year: Bank of America Merrill Lynch has an estimate of 6.8%.
That?s primarily because investments aren?t taking off as can be seen from the CMIE data, which shows that new investment proposals in 2011 were down by half than in 2010.
Moreover, private consumption has seen a deceleration in the GDP numbers for the September quarter at 5.9% y-o-y. The trend could intensify as the slowdown begins to bite; personal loans grew at just 13.4% y-o-y in November whereas at the start of the year, in April, they were growing at 18% y-o-y.
The government believes inflation will start coming off by March; that?s possible because there will be some base effect but more so if prices of commodities continue to fall: prices of copper were down 25% plus last year, aluminium 18%, lead 20% while natural gas prices, in the US, ended 2011 at a 27 month low. However, in India it?s the price of crude oil that needs to correct; that, however, is sticky at $107 per barrel. Moreover, food inflation may be at a four ?year low of 1.8% but prices of food need to stay put.
The bigger problem though is that the government continues to spend; the country?s fiscal deficit for the year is now estimated at 5.6% of GDP and it?s unlikely the government will cut back on social schemes or subsidies. In fact the Food Security Bill will only add to the government?s expenses. Under the circumstances it?s hard to see how inflation can come down meaningfully. And if the government continues to borrow, as it?s doing, interest rates can?t come down and investments can?t be stimulated. In all this, the rupee is depreciating and exports are slowing; the merchandise deficit in the September quarter widened to nearly $44 billion, the highest ever, pushing up the current account deficit to $16.9 billion or 3.7% of GDP. The surplus on the capital account shrank on account of portfolio outflows of $1.4 billion.
It?s unlikely foreign investors are going to be flocking back to Indian shores in a hurry even if valuations appear saner. Further earnings downgrades can?t be ruled out and the market too has been de-rated indicating that investors have lost some confidence in the India growth story. The key triggers for a bounce back will be interest rate cuts and policy initiatives. Rate cuts are tipped to happen sometime in March if inflation subsides and banks will probably cut rates by about 150 basis by September. But before that the government needs to be able to push through policies so that companies are confident of adding new capacities.
There?s some good news in the manufacturing PMI for December coming in at 54.2 for December well above the 51 in November and the highest in six months. But the momentum would need to sustain. Expectations have rarely been lower.