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The outlook for India

Economics & Finance

The outlook for India

The outlook for India

India’s economy could return to growing by eight per cent in the medium term, thanks in part to the “pretty good” financial health of the domestic corporate sector and the country’s strong savings, says Rakesh Mohan, former deputy governor of the Reserve Bank of India.

This is despite declining exports, weakening corporate profits and rising national deficits due to the government’s economic stimulus programmes.

“Overall I think that one can say with a relative degree of confidence that unless there are more accidents that the world has in store for us, that assuming the world comes back to some degree of normality in the next 18 months or earlier, that we should come back, given the high saving rates and investment trades and the financial stability that we have ensured.”

Mohan notes that, between 2003 and 2008, India’s economy grew at an annual average of 8.5 per cent, which subsequently declined to 6.7 per cent in the fiscal year of 2008-2009 (April to March). For the upcoming fiscal year, he expects GDP growth of more than six per cent.

“It does seem that the worst is over in terms of the recession, both globally and in India.”

Asked about the weakening US dollar’s impact on India’s economy, Mohan says the impact is limited. But he is concerned that India could see a large amount of capital inflows as investors flock to India, in view of market expectations of comparatively lower interest rates in the US and Europe. He says that when the hot money exceeds India’s current account deficit, the central bank will have to sterilise the excess liquidity in a bid to rein in inflation.

Speaking to INSEAD Knowledge, Mohan was upbeat about the outlook of India’s rapidly growing telecommunications industry, the “somewhat middling success” of the ports, and the privatisation and development of airports.

However, he acknowledges that “significant problems” remain in the power industry, such as cash flow generation due to high tariff subsidies for some sectors and difficulties in collecting tariffs. In addition, progress on India’s highway construction programme has been “somewhat slower than what we wanted.”

Nevertheless, Mohan is confident that the government will push ahead with its various major infrastructure projects such as the construction of highways and urban renewal projects.

“The issue really is to be able to improve our user charges so that whether it’s the public sector that invests or the private sector that invests, you actually get returns on those investments so you can go further and keep investing.”

As less than 30 per cent of India is urbanised, Mohan says India will continue to develop and see growth in the next three decades.

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