Even before India has recovered from the economic slowdown of 2008, it is facing another serious issue of slowdown. I feel India is suffering a lot now compared to 2008. While lack of investor confidence and depreciation of rupee are major concerns, European slowdown is adding fuel to the fire. As a student of management, I will try to explain in this article Indian inflation and GDP and its direction in the short run in brief.
India is suffering from balance of payments crisis as capital account surplus is unable to compensate huge current deficit. In that way, India is a goods import oriented country with major sources of income in the recent times being services and remittances. Rupee has depreciated around 20% in the past one year with rupee being traded at 52.5-53 rupees/dollar in the foreign exchange market. RBI has not taken significant measures like selling foreign currencies, thus making it a clean floating price at least in the last one year. This may increase competitiveness of the Indian goods in the foreign markets. Export based industries like software are making the most of this situation. But at the same time, cost of importing goods like petrol, diesel and other technological products will increase. Increase in the prices of fuels will have huge impact on all the good prices which may further increase the inflation.
Indian inflation is hovering at double digit levels for the past year or so. Even though, it is showing signs of abatement, it is mainly because of high base price and slight reduction in the prices of food articles. Prices of mineral fuels and machinery are still increasing. Part of the increment is because of rupee depreciation as discussed. RBI has adopted contractionary monetary policy by increasing repo rate, reverse repo rate, CRR and thereby interest rates. Meanwhile GDP of last quarter and projections for 2012 are very meek with expected growth in GDP being 6-6.5%. High inflation is stopping government to go for expansionary monetary policies and thereby paving way for high growth in GDP.
Lack of policy implementations in the recent times (allowing FDI, Lokpal and others) and scams like 2G, CWG have lowered the investor confidence in the market. Lack of infrastructure development and slow adoption of technology may also be the reasons for lack of confidence. Experts say that inflation levels will come down to controlled levels by March and RBI policies will be reversed by the end of April. Quick implementation of policies and setting the correct ground for April will help increase the growth of GDP in the next fiscal year. U.S. is expected to resort to expansionary policy as elections are approaching and it will be good news to the entire world. However lull in the economy and job market may continue till March 2013 due to the globalness of the issue.
