by NR INDRAN / INT

Global Growth and Sovereign Issues at the Forefront — Recent events in the US(S&P downgrade, growth concerns) coupled with growing worries of a sovereign debt contagion in the EU are bringing inevitable comparisons to the 2008 crisis. While the situation today is much more benign and policy makers are relatively more pro-active, the worry is that the core problem remains that of ‘high debt’.

India is Relatively Better Placed — Assessing key channels through which global developments could impact other markets (real economy, financial sector, thematic and portfolio risks), we find India is less impacted. While low exports/GDP relative to other countries, domestically financed fiscal deficit, limited exposure to foreign liabilities, and a healthy banking system are positive, in times of risk aversion, India immediately comes on the radar due to its twin deficits and reliance on external capital.

But No Room for Complacency as Policy Maneuverability is Less — While India is relatively better placed, the worry this time is (1) A slowing economy and (2) Limited ammunition v/s 2008 that Indian policy makers have in the event of a crisis. This is on both the fiscal and monetary front; where higher deficits and stickier inflation would limit space for conventional policy responses. As a result, there is a growing need for measures to improve the investment environment.

Macro Implications — (1) Growth – Similar to the previous crisis, there remains a worry that the last quartile of tightening could hurt growth. We are maintaining our 7.6% GDP estimate for FY12, although a deterioration in the global environment could shave off 20bps from estimates (2) Rates – While global developments could result in most central banks pausing rates this year; inflation staying sticky at 9%+ suggests that the RBI could tighten once more in Sept (3) Fiscal – While oil prices have retraced their fall post the Aug 5th US downgrade, Brent falling below US$90/bbl would result in OMCs breaking even on diesel and reduce the subsidy bill (4) External – FX reserves at US$319bn are comfortable, but high foreign holdings in stocks and a CAD make India vulnerable in times of increased risk aversion.

Figure 1. India – Macro Snapshot (%)

Year -end 31 March FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E

Real GDP growth (%) 9.5 9.6 9.3 6.8 8.0 8.5 7.6 8.2

Agriculture growth (%) 5.1 4.2 5.8 -0.1 0.4 6.6 2.5 3.0

Industry growth (%) 9.7 12.2 9.7 4.4 8.0 7.9 6.8 8.0

Services growth (%) 11.0 10.1 10.3 10.1 10.1 9.4 9.2 9.5

Fiscal Deficit (Centre+States) -6.5 -5.4 -4.1 -8.5 -9.1 -8.1 -8.3 -7.1

Current Account Deficit -1.2 -1.0 -1.3 -2.3 -2.8 -2.6 -2.8 -2.2

WPI (Average) 3.7 6.5 4.8 8.0 3.6 8.6 9.0-9.5 7.5

INR/USD (Average) 44.3 45.2 40.2 46.0 47.4 45.6 45.2 44.4

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