Monday, 1 August 2011

Is India economy losing the giant path?

India has been a country where many regard as the next emerging market. Based on the IMF report, India's economy is the tenth largest in the world by nominal GDP, and the fourth largest economy in terms of purchasing power parity (PPP). It is also one of the world's most populous country. The economy is growing rapidly for the past decade, especially after free market principles were introduced in 1991, the economy is still facing problems like income imbalance, high unemployment and poverty in certain areas of the country, including the growing trade and current account deficit. All these are showing sign of it slowing down, losing the advantage over its neighbouring countries. 

Recent years, many foreign banks around the globe have been flooding into India, hoping to gain a foothold in this upcoming emerging economy. Of course, India has the potential, with its vast amount of population and the deep industrial potential ahead. Not to forget about the country's successful advancement and development in the information technology field. Many in the past see the potential and have been setting up companies in the region, making it to be possibly the next Silicon Valley of Asia. With its vast amount of labour force, the potential of the money market will be enormous, especially from the prospect of credit market will be required. In addition, India dependence on its service trade has helped to sustain its economy.

During the 2008 global financial crisis, the strength in India's domestic demand had reduced the effect and impact on its economy. However, this also increased the needs for import, which create the trade deficit until today. Latest trade balance reported in The Economist reported a negative $112 billion dollars, with its current account balance reported a negative $33 billion dollar lost. India's deficit has been growing every year.

Source: IMF, World Economic Outlook Database, April 2011

Source: IMF, World Economic Outlook Database, April 2011

Source: IMF, World Economic Outlook Database, April 2011

Net exports had slowed. The results also show that the deficit is not financed by Foreign Direct Investment (FDI), but rather short-term capital inflows, as noted from a report from Tushar Poddar of the Goldman Sachs. In June this year, Reserve Bank of India (RBI) did a rate hike of 50 bps, in addition of 125 bps hike since May 2011. The RBI is setting a high expectation of the core inflation in the country. With its latest rate hike, it hopes to add pressure to prevent a surge in its currency and also current account deficit. However, some experts view this move indirectly killing its export competitiveness.

Some possible solutions which could see India to advance is to be more involved in intra-regional trade and be more integrated with the economies within the region. The country still have a long way to reach the booming stage as long as their manufacturing export do not increase to increase the country's competitiveness in the region. This was shown in their domestic manufacturing industrial which is under-developed for a long time. Of course, with development in the country industrial, more investment in equipment and manufacturing plants will be needed. In addition, job market will be opened up for its vast amount of ready labour force, which increases productivity output and income. With the increased income, additional investment generally increases economic growth. Investment in education can bring the country forward with homegrown talent, without dependence of foreign talent. Their people can move out to other parts of the world to learn new skills and knowledge, which can bring back new strategies and solutions to their country's prosperity. With its vast domestic market potential, financial stability can be achieved with constant saving habit, and also opens up opportunities for financial institutions to offer financing solution for India's private industries. Which is why we view the moves of some major banks around the world, wanting to enter into the India market in the early stage to gain a foothold and establish themselves as one of the major financing solution to the growing private industries.

India's trade imbalances will continue for long until it can offer local alternatives of the same quality at competitive prices in the international arena. India's growing deficit is really a serious threat to its future advancement. If it is not dealt with in the early stage, the huge reserves that the country saved over the years will soon be depleted. As we have seen in the past, some economies fell off the grace and depleted their huge reserves when fiscal actions were not taken appropriately. Whether India economy will experience a slowdown in its growth due to lack of investment in the industrial, or losing out to its neighbouring countries, India's economy will still have the potential which is yet to unleash.


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