Incredible India
India’s economy has impressed in the face of a very severe global recession,
bottoming out at a still sol...
Potential risks going forward
Even though India has handled this externally shock impressively well there are still a
rang...
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Incredible India

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This is an article written by Magnus Prim, SEB Singapore Branch about the economical situation in India.

Published in: Business, Economy & Finance
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Incredible India

  1. 1. Incredible India India’s economy has impressed in the face of a very severe global recession, bottoming out at a still solid 5.8% y/y growth rate, and now recovering nicely with the September -09 quarter posting 7.9% despite some local challenges in the form of a weak monsoon and rising oil prices. What has made this astonishing performance possible? Helping factors There are several reasons why India has been able to perform as strongly as it has. Most importantly India is less vulnerable to external shocks because it has low exposure to trade. Presently India’s exports stand at around 20% of GDP whereas few other Asian countries have a ratio below 50% and some well over 100%. This has provided India with significant insulation against the drop in external demand that hit other Asian nations so hard. On top of this, Indian banks were generally not exposed to the troubled portions of the global financial system and remained largely unaffected by a development that roiled large parts of the global financial system. Finally, there was also some luck involved. When the crisis hit it was an election year in India which, true to form, meant that fiscal spending was already higher than it usually is (a common and well accepted way to “buy votes” ahead of an election). Thus, there was no lag between a need for fiscal stimulus and its implementation when the crisis hit and this certainly served to hold consumption up much better than would otherwise have been the case.
  2. 2. Potential risks going forward Even though India has handled this externally shock impressively well there are still a range of potential risks going forward. The two most important are likely to be the strained fiscal situation and monetary policy constraints. Although the overall debt levels for India are not extremely high compared with many other countries, its running deficits are certainly a big concern. Deficit targets have repeatedly been postponed while off-budget activities have tended to increase. Indeed, if the crisis would have proved longer India might not have been able to continue to provide the necessary fiscal stimulus. The risk regarding monetary policy is mainly that there are indications rates will remain low for too long. Inflation is already picking up in India and will be significantly above the central bank target and still it is not a done deal that the bank will act forcefully enough due to an apparent central bank preference to rate support to the economy higher than keeping inflation under control. Outlook Still, even though there may be some risks to the outlook and there may have been some degree of luck involved in how well India survived the crisis, it is clear that India stands well positioned to benefit from a global recovery and maintain and build on the positive momentum it was able to keep throughout this economic crisis. We are looking for GDP growth at 8% this year.

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