×
Home Companies Industry Politics Money Opinion LoungeMultimedia Science Education Sports TechnologyConsumerSpecialsMint on Sunday
×

The return of confidence

The return of confidence
Comment E-mail Print Share
First Published: Mon, Jul 27 2009. 10 12 PM IST
Updated: Mon, Jul 27 2009. 10 12 PM IST
The Reserve Bank of India (RBI) on Monday released the latest results of two important surveys it conducts to gauge business confidence and expectations about economic growth. Both bring good news: The economy is stabilizing and is perhaps ready for a sharp rebound.
The central bank’s industrial outlook survey conducted in April and May shows that business sentiment has improved. There is a reason why this matters.
Tax cuts and a huge increase in government spending ensured that economic growth in India did not collapse in sync with what happened in the developed countries. But India already has a dangerously high fiscal deficit and depending on government spending to keep growth on track is not sustainable. Investment spending by companies will have to pick up soon if the V-shaped rebound is truly to become a reality. The improvement in business confidence will help stir animal spirits once again.
Meanwhile, the survey of professional forecasters conducted in June also tells us that the economy is looking up. The median growth forecast for 2009-10 has been increased from 5.7% to 6.5%, though the estimate of growth in farm output has been scaled back a bit.
The worst seems to be over. But is this the end of the rocky road? That depends on two factors. One, how soon the global economy bounces back. Two, how soon companies start spending on new capacity creation that will allow the government to begin cutting its fiscal deficit. Neither seems likely right away.
Meanwhile, there is another problem on the horizon: inflation. The unprecedented and coordinated gush of liquidity released into the world economy by various central banks could push prices in tandem with output. Oil prices are already 50% above their recent lows and will feed inflation. A poor monsoon is likely to push up food prices even more. The economists who participated in the RBI survey expect the Wholesale Price Index to climb to 5.9% in the first quarter of 2010-11.
Stagflation is most unlikely, but India’s policymakers will have to struggle with a milder combination of below-trend growth and above-trend inflation in the quarters ahead. That’s not bad, given the mess in other large economies.
Is the worst over? Tell us at views@livemint.com
Comment E-mail Print Share
First Published: Mon, Jul 27 2009. 10 12 PM IST