Monday, January 16, 2012

The Mix Signals from Indian Economy!

Change is the essence of life, the old order changes yielding place for new. However, all changes are not historic in the impact they have on society, economy or polity. But among the many changes that India has witnessed in last decades, its convergence to the liberalisation of economy was proven most transformative and fateful to an extent. In last twenty years, statistical basics have moved up from prosaic to a resilient level and Indian economy now stands with better chances to play ever important role at bilateral and multilateral international platforms. But playing leading role in an integrated global era is not proof from the risk involved in doing it so, naturally time is of testing for Indian economy and its regulatory institutions to how well they can cope and manage a smooth way forward. Close watch on international scenario is most imperative, especially on the tailspin economies!

At the global level, with both the US and the European market are uncomfortably walking through the fiscal crisis, there are growing fear about the world economy entering into another recession. This would have a subversive bearing on the natural growth of the Indian economy, both through trade and funds flows channels. Affects are already coming through in terms of the consistently dwindling FIIs in Indian market, which is creating huge mismatch of earlier conceived expectations from the foreign investments. The unquiet financial regulation is adding the plight to even grimmer; the persistent contradictory monetary policy stance of RBI is now clearly taking a toll on performance of the industrial sector and also on overall economy. The flagging business confidence in Indian market must be a matter of concern for policymakers as falling confidence levels of India Inc can create bottlenecks in investments and business plan, which could finally stall the momentum of India’s economic growth.

As for now, India enjoys an advantage in its high savings and investment rates, currently a third of GDP; a relatively low GDP per capita on purchasing power parity giving significant potential for growth and continuing industrialisation and urbanisation. India's consumption-led economy continues to make the country a highly attractive investment destination in the short-to-medium term. As its domestic demand-driven growth model has helped the country weather the volatility in the global markets, providing significant growth opportunities to businesses. While the overall outlook for India is positive, the country will need to address rising inflation and the governance deficits. Provided India's inflation does start to fall back by the end of this year, and the US and EU economies do not slip back into recession, the 'soft patch' for Indian growth should be relatively short-lived. Once inflation is in check, and interest rates are no longer rising, consumers will be more willing to spend, supporting a general improvement in the business environment, with growth steadily accelerating during 2012.

Service industry accounts for 57.2%of the India's close to two trillion dollar GDP while the industrial and agricultural sectors contribute 28.2% and 14.6% respectively. Agriculture has remains the predominant occupation in rural areas, accounting for about 52% of employment. The service sector makes up a further 34% and industrial sector around 14%.However, statistics from a 2009–10,which used a smaller sample size than earlier surveys, suggested that the share of agriculture in employment had slide to 45.5% and that substantial chunk of working labours were shifted in the secondary and tertiary sector. So for knowing the pulse of Indian economy, it’s quite essential to predominantly dwell with the services and industrial sector, which normally impacted through the short term variables unlike the primary sector that rests on the long term perspectives.

Though it’s seemingly tough figuring out the safe or unsafe sector in 2012 and ahead, so it would be a prudent deliberation, if having holistic take while assessing few very important areas of Indian economy:-
The Challenges from Energy Sector-
At a time when India has staked its claim to a seat at the high table alongside world powers, around 57% of rural households and 12% of urban households in the world’s second most populous country have no access to electricity, according to a report by Pricewaterhouse Coopers and the Indian Electrical and Electronics Manufacturers Association. That partly explains why India’s per capita power consumption of around 700 units a year is way below the world average of 2,600 units and developed countries’ average of 8,000 units. India’s track record in adding power generating capacity is pathetic. In the five years to 2011, the country added only around half of the power from original target set out in plan.
The country has an installed power generation capacity of 162,367MW; its power plants have an average efficiency rate of 76.52% of installed capacity. An original target of adding 78,577MW by 2012 has been revised to 62,374MW. The government is trying to find solace in the fact that the 22,302MW of capacity added in three years of the 11th Plan (2007-12) exceeds the entire capacity addition in the 10th Plan. New execution strategy, if not the new resolution itself would be very essential for the coming out of the energy mess!

Indian Banking Sector: Stable but no longer Unchallenged!
Indian banks, the dominant financial intermediaries, have made good progress over the last five years, as is evident from several parameters, including annual credit growth, profitability, and trend in gross non-performing assets (NPAs). While the annual rate of credit growth clocked 23% during the last five years, profitability (average Return on Net Worth) was maintained at around 15% during the same period, and gross NPAs fell from 3.3% as on March 31, 2006 to 2.3% as on March 31, 2011. Good internal capital generation, reasonably active capital markets, and governmental support ensured good capitalisation for most banks during the period under study, with overall capital adequacy touching 14% as on March 31, 2011. At the same time, high levels of public deposit ensured most banks had a comfortable liquidity profile.
But on the other side, Indian banks faces several challenges as well, such as increase in interest rates on saving deposits, possible deregulation of interest rates on saving deposits, a tighter monetary policy, a large government deficit, increased stress in some sectors (such as, European and US markets, State utilities, airlines, and microfinance), restructured loan accounts, unamortized pension/gratuity liabilities, increasing infrastructure loans, and implementation of Basel III. Year 2012 would be crucial for Indian banking industry to perform well in the changed circumstances, besides RBI too has to adopt a hassle free attitude on introducing few new private sector banks which have been a due for long besides giving Philip to reform in financial sector. An increasing reliance on Regional Rural Banks (RRBs) for rural business would be very worthwhile, as in this particular domain most of experiments have proved too disappointing till now.

Housing Sector: Potential Growth Agent:-

In India’s mushrooming real-estate sector, the residential market is the most important segment. With economic growth and growing prosperity, the demand for housing has increased constantly in the recent years. According to RNCOS latest research report “Indian Housing Sector Analysis”, with the government support, the annual demand for residential buildings in the country is anticipated to grow at a CAGR of 52.5% by 2014 to reach 22.1 Million Units.

Some of the key findings of the report are:

- The luxury housing sector possesses huge future growth potential as the number of rich people in India is increasing at a faster pace than in other emerging nations.
- The senior housing sector has been gaining momentum and is expected to expand further. As per estimations, in India, there will be 76 Million people above the age of 65 years by 2014 as against 67 Million seniors in 2011.
- In FY 2011, the credit growth rate in the Indian mortgage finance market was around 18% due to factors like stable operating environment and buoyant property prices, among others.
- Housing sector is the key driver of the Indian cement industry, and it is anticipated to constitute around 54% of the total cement demand during FY 2008 to FY 2012.

Finding of this report is encouraging and gives new hope to real estate market in 2012.

Pharmaceutical: Bullish on investment!

The Indian pharma companies remains positive as outlook for growing domestic market and export business present a bright prospect for the companies, said a report by rating agency CARE.
"The patent expiry in the regulated markets would be the primary growth driver for the Indian Pharmaceutical Industry over the next 3-5 years. Growing trend in outsourcing by global pharmaceutical companies will further fuel exports," said Mitul Budhbhatti, CARE Ratings. Indian pharma's growth story has also stoked private equity interest and deal makers expect 2012 to see the quantum of these deals pick up in 2012. On the investment front, it sounds well though a large concern remains on the affordability side of medicine. Regulators must have to address the growing gulf of primary health care in the country, so reasons are few to be completely bullish alone on the flow of investments in Pharma sector. Much more is in need to be done here.
IT/ITES: Big Elephants Dilimnas!
As par NASSCOM findings, IT-BPO sector in India aggregated revenues of USD 88.1 billion in financial year 2011, generating direct employment for over 2.5 million people, as the industry continued its journey on the core themes identified for the next decade – Diversification, Transformation, Innovation and Inclusion. But henceforth, life is not going to be same again for the outsourcing industry, after the pro-insourcing drive led by Barack Obama in USA and overall shrinkage of European economy will negatively alter the growth track of Indian IT/ITES sector. Domestic demands will be continue but for international markets, new policies would be needed to carve out for meeting the tough challenges. This year, every act from Indian IT Company should be in line exuding best competency at global level. Alone chasing the will of the wisp wouldn’t be enough!

For a while, recalling the study of veteran Economist/journalist, Mr.Premshankar Jha (“Managed Chaos”/Sage publications) on China’s growth would be very insightful. The crux of his opinion is, China has made huge success in different areas but in longer term, the lack of democracy would be making its growth complicated and unsustainable. So, India would remain a key growth market from emerging economies, even the recent study done by the Ernst&Young also justifying India’s potential edge in growth march up to 2013 vis-à-vis China. Challenges are umpteenths before Indian economy so is laying immense potential ahead too; the policy responses would make the actual course of future!
Atul Kumar Thakur

1 comment:

  1. Wow!!! Brilliant research piece by Mr. Thakur.. Nation's economy in a nutshell.. !!
    - Varsha Singh