Wednesday, August 22, 2012

NIKHILESH BHATTACHARYYA, ASSOCIATE ECONOMIST, MOODY’S ANALYTICS

Even though the uncertain financial situation in Europe and the Middle East warrants caution, there are stll several reasons for optimism on the domestic front

Although most indicators on the Indian economy are encouraging, persistently high inflation has given cause for concern. Wholesale price inflation was 9.6% y-o-y in April, while consumer price inflation was above 13%. The RBI doesn’t have an inflation target but aims to maintain inflation perceptions between 3-4.5%. These perceptions have been tested over the past year by persistently high inflation.

The uncertain financial situation in Europe and the Middle East has cast a cloud over the outlook for India. An intensification in European debt problems could precipitate another slump in foreign investment and lending and could cause a sharp correction in the stock market following the boom over the past year. These fears were evident recently, as credit default swaps for Indian banks rose significantly while the Sensex slumped for a brief period.

Even though the uncertain financial situation in Europe and the Middle East warrants caution, there are reasons for optimism on the domestic front. Leading indicators point to sustained rapid growth. Importantly for agriculture and inflation, monsoon rains have arrived on schedule, and early indications are encouraging. The Indian Meteorological Department has forecast monsoon rains to be 98% of their long-term average. A normal monsoon would likely lead to a rebound in agricultural output, which would boost GDP growth and ease inflation. However, it is important to bear in mind that last year’s monsoon rains weakened from August, and it will not be clear until harvesting in October as to how agricultural production will fare this year.


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