Economic turbulence to continue in 2012

Combating the economic slowdown and arresting the rupee's fall will remain the main priorities for the government and the Reserve Bank in the New Year, though inflation, which remained a major problem throughout 2011, may cease to be an important issue in the months ahead.

As the economic woes, driven mainly by global factors, spill over to 2012, the government will also have to deal with the spectre of policy paralysis by promoting economic reforms and boosting the investor sentiment.

Although 2011 began on a positive note, with the economy recording a growth of 7.8 per cent in the quarter ending March, 2011, and the Economic Survey (February, 2011) projecting an acceleration in growth to about 9 per cent in 2011-12, the euphoria was short-lived.

The growth rate slipped to 7.7 per cent in the quarter ending June, 2011, and 6.9 per cent during July-September from 8.8 per cent and 8.4 per cent, respectively, in the corresponding periods last fiscal. The figures for the October-December quarter are not yet out, but indications are that they would be no better.

Worried over slowing growth, a group of industry leaders, including HDFC Chairman Deepak Parekh, wrote open letters to the government expressing concern over a "policy paralysis" and underlined the need for firm action to deal with the situation.

Their repeated outbursts, however, evoked a sharp reaction from Prime Minister Manmohan Singh, who blamed industry head honchos for spreading despondency by criticising the government.

However, the fact of the matter was that both the Finance Ministry and RBI lowered the growth projection for the current fiscal to around 7.5 per cent from 8.5 per cent in 2010-11.

While the RBI had earlier projected a growth rate of 8 per cent, the Finance Ministry in its Economic Survey had pegged growth at around 9 per cent.

Industrial growth, as measured by the Index of Industrial Production (IIP), turned negative in October, experienced a decline of over 5 per cent. These signals do not augur well for economic growth in the coming months.

The Finance Ministry had attributed the slowdown to "global factors like the slowdown in the world economy, exacerbation of the euro zone crisis, hardening of crude oil prices in the international market, as well as domestic factors such as the decision to battle inflation by tightening monetary policy and cutting back fiscal stimulus".

With regard to the global factors, the sovereign debt crisis in euro zone countries continues to pose a threat to the global recovery, which has been described by several experts as being in a fragile state.

Despite the efforts of the G-20 to contain the crisis, it has spilt over into 2012 and there will be no respite for global leaders grappling to find a workable solution to the sovereign debt problems of euro zone nations.

Source: http://www.tribuneindia.com/2012/20120102/biz.htm#1