Silver Linings in 2012

As 2011 draws to a close, the economic outlook appears gloomy. Growth is slowing down: with luck the economy may clock a growth rate of 7 per cent in FY12, quite a comedown from the 8.5 per cent rate notched up in FY11. Manufacturing has been badly hit, as the lIP (index of industrial production) figure of -5.1 per cent for October brought home starkly. Private investment has been on the decline ever since the 2008 crisis. Now private consumption too is faltering, owing to high inflation (that reduces purchasing power), high interest rates, and a weak job market in urban areas. Government spending, the mainstay of GDP growth since the credit crisis, is also bound to decline in future, since the government’s revenues have taken a knocking amid slowing growth. Moreover, it will perforce have to curtail spending in order to rein in its fiscal deficit. Against such a backdrop, to get dispirited about the economy’s prospects would be natural. However, a closer look reveals a few silver linings. High inflation has been the economy’s biggest bugbear for the last two years (last 21-month WPI average: 9.7 per cent). But December onwards inflation is expected to begin softening. The Reserve Bank of India (RBI) expects it to abate to 7 per cent by March 2012, while economists at Goldman Sachs expect it to average 5 per cent in FY13. Several factors will contribute to this softening: the high base of 2011; softening of commodity prices due to weak global growth; lower food inflation due to a good monsoon in 2011, and lower inflation in protein-based foods due to a cyclical improvement in supply. If inflation softens, ca

This article was originally published on January 20, 2012.