The challenges faced in 2011 could well be paving the way for opportunities for the Indian economy

to tap in 2012. The overall mood about the Indian economy is gloomy as we are about to leave 2011 behind us and enter 2012. The sense of gloom is not difficult to appreciate as the progress on important second-generation reforms has been tardy, investors have lost tonnes of money in the stock market, external sector sustainability issues have resurfaced after a long gap, strains are observed in government finances and the growth prospects for the global economy have worsened. However, seen from a different perspective, the challenges faced in 2011 could well be paving the way for opportunities for the Indian economy to tap in 2012. For instance, the depreciation of the rupee by around 20 per cent, which made imports substantially costlier in the second half of 2011, would help in improving the price competitiveness of Indian exports in 2012. The interest rates, though they increased throughout 2011, have now peaked and the easing, when it begins in 2012, will boost credit growth and support higher output growth. The systemic recognition of NPAs in banks, which caused their levels to rise significantly in 2011, will help inculcate better credit discipline and will prompt banks to rev up their recovery mechanism. Improvement in asset quality, coupled with better growth in business on account of easing interest rates, would help banks in improving their earnings.

Forward-looking steps
Year 2011 will be remembered for a number of forward-looking measures. First, despite the slow pace on a host of reforms, the government approved the New Manufacturing policy on October 25, 2011. The New Policy has an objective to increase the share of manufacturing in GDP from 16 per cent to 25 per cent and create 100 million additional jobs in manufacturing by 2022. The Policy also envisages setting up seven National Investment and Manufacturing Zones with single-window clearance and flexible labour laws. Second, on the trade front, government came out with a strategy paper in May to double India's exports to $500 billion by 2103-14 and subsequently India entered into a comprehensive economic partnership agreement with Japan in August. Third, a new Draft Telecom Policy was formulated, which purports to achieve 100 per cent rural teledensity by 2020 from the present 35 per cent. The Policy further mandates that 80 per cent of telecom networks is to be domestically manufactured by 2020. Fourth, the last vestige of administered interest rates was done away with the deregulation of interest rates on savings bank deposits. Fifth, with a view to facilitate long-term debt finance for infrastructure projects, the RBI and SEBI came up with guidelines for setting up Infrastructure Debt Funds either as mutual funds or NBFCs.

All these measure are significant from a medium to long-term perspective. Further, the assertion by the Prime Minister that important issues such as FDI in retail, the Companies Bill and the Pension Bill will be taken up at the politically correct time is indicative of positive intent. One should not forget that it is politics that sets the contours for economics.

Inflation factor
The medium-term growth story of India, founded upon domestic demand-led growth, demographic dividend and democracy, remains intact. The rating upgradation of India's longterm sovereign debt by Moody's and Dominion Bond Rating Service last week also point to the robust underlying growth drivers for India. What had changed in the short term (2011) was the investor sentiment in the wake of high levels of inflation for a relatively longer period of two years. The economic woes of India in 2011 centred around inflation. Stubbornness of inflation prompted the RBI to raise rates 13 times. High inflation and high interest rates create an atmosphere of uncertainty that hurts investment decisions where a medium-term view of the economy is to be taken. As the interest rates moved up, they prompted businesses to defer long-term investment decisions. A clear evidence of this was found during July-September 2011 when gross fixed capital formation witnessed negative growth. Another fallout of rising rates was lower earnings prospects of corporates, which has kept the FIIs away from the Indian market. Thus, economic costs of inflation have been really huge. Policymakers try to avoid higher levels of inflation as they hurt the poor most. Sustained high economic growth, coupled with government's intervention in the form of guaranteed employment generation programmes (MNREGA) in the recent past, has led to improvements in purchasing power both in rural and urban areas. The Approach Paper to the Twelfth Five-Year Plan has pointed out that average real wage rates increased by 16 per cent at the all-India level between 2007 and 2010. The growth in some of the relatively poorer states such as Bihar and UP has been around 20 per cent over this period. Further, government has indexed the MNREGA wages with inflation beginning January 2011. All these developments have helped to protect the living standards of the poor amidst high food inflation. Thus, in the recent episode of high inflation, economic costs seem to have outweighed the social costs associated with it.

Sustaining growth
The global economic outlook looks much strained at the close than what it was at the beginning of 2011. Nonetheless, the scenario looks much better than what it was two months ago, mainly due to better growth expectation from the US and broad consensus amongst Euro nations for a fiscal compact and the support to banks from the ECB.

Back home, growth has decelerated significantly in the July-September quarter when compared with India's potential and the growth achieved in the past. Notwithstanding the deceleration, the overall growth that India would achieve in 2011 would still be decent when seen in the international context. The South-West monsoon rainfall has been above normal in 2011 and food inflation has been coming down consecutively for the past seven weeks. Manufacturing inflation, however, still rules at higher than acceptable levels. The non-food inflation numbers will also moderate in 2012 as the lag and cumulative effects of past rate hikes will play their course. Along with the inflation, growth too will moderate. Thus, a key issue for policy makers in 2012 would be to sustain growth. Hopefully, there will be a revival of investor confidence once inflation is brought under control and that, to some extent, would counter the pull on growth. (The author teaches Economics at the Xavier Institute of Management, Bhubaneswar. Views are Personal.)