India should make most of global macroeconomic environment improving
The global macroeconomic environment is improving but India needs to revive its investment climate to make the most of it.
Graphic by Santosh
ICICI Bank CEO and MD Chanda Kochhar
In the financial markets, we saw significant episodes of risk aversion caused by these trends as well as the fear of a systemic shock arising out of the sovereign debt crisis in Europe.
As we look ahead at 2013, there are several positive signs. The US economy continues to make progress on the path of recovery. Overall growth in 2012 is estimated to have been slightly higher than the previous year, and there are signs of improvement in both the housing scenario and unemployment rates. Monetary policy continues to be accommodative, and the banking sector has stabilised.
"WITH THE POLICY MEASURES BEING UNDERTAKEN TO ADDRESS CURRENT CHALLENGES, AND STABILITY IN THE GLOBAL ENVIRONMENT, WE CAN EXPECT GROWTH TO STRENGTHEN IN THE COMING YEAR"
However, the path to recovery is likely to be prolonged. While growth decelerated to some extent in China, recent trends have led forecasters to project a higher growth rate in 2012. With inflation stabilising, monetary policy being eased and stability in the global markets, emerging economies are also expected to see some recovery in the coming year. Overall, the world should see modestly higher growth in 2013 compared to 2012.
In India, our strong domestic fundamentals helped us achieve growth rates of eight to nine per cent for several years and drove the country's quick recovery after the global financial crisis. However, over the last two years, we have seen a moderation in growth, driven by both domestic as well as global factors.
There has been a slowdown in investments in infrastructure, with projects facing issues in environment clearances, land acquisition and fuel availability. These have led to suboptimal utilisation of recent capacity additions and a postponement of new investments. On the inflation front, oil prices have remained elevated and volatile; and domestic supply side constraints have accentuated overall inflationary pressures in the economy.
Persistently high inflation has resulted in a tightening of domestic monetary policy which has in turn dampened domestic demand. India's fiscal and current account deficits have also been a source of concern. The moderation in domestic growth and increased global risk aversion have made capital flows volatile, resulting in depreciation in the currency.
5 per cent
Central Statistical Organisation's growth estimate for the Indian economy for 2012/13
Several policy reforms have also been announced by the government for the external sector, including measures for increasing exports and opening up various sectors of the economy to foreign capital. The benefits of these measures on market sentiment are clearly visible with a sharp increase in FII inflows in recent months and a stabilisation of the exchange rate.
Recent trends in inflation have also been encouraging with overall WPI inflation moderating from 8.1 per cent in September 2012 to 7.2 per cent in December 2012. This has enabled the Reserve Bank of India to reduce policy rates in their latest policy review and adopt a more growth focused stance.
The key area which we need to focus on is reviving investment, with priority to ensuring completion and operationalisation of projects currently under implementation. The potential impact of this on economic growth can be substantial.
As an example, it is estimated that by addressing fuel availability issues, about 22,000 MW of installed power capacity can be made operational, which, in turn, would have a significant impact on the GDP growth. In this context, the formation of the Cabinet Committee on Investments to track and expedite large projects is a welcome move.
The key area which we need to focus on is reviving investment, with priority to ensuring completion and operationalisation of projects currently under implementation. The potential impact of this on economic growth can be substantial. As an example, it is estimated that by addressing fuel availability issues, about 22,000 MW of installed power capacity can be made operational, which, in turn, would have a significant impact on the GDP growth. In this context, the formation of the Cabinet Committee on Investments to track and expedite large projects is a welcome move.
The author is CEO and Managing Director, ICICI Bank
