Analysis of the Financial Year 2009-2010

Overall the year 2009-10 was a year of optimism for the Indian industry.  The recovery that we saw in the 2^nd half of the current fiscal was remarkable inspite of decline in agricultural output.  The worrying factor that has evolved in the current fiscal was the double digit food inflation that was caused due to supply side constraints & had nothing to do with the relaxed monetary policies. Over the last 2 months the spillover of the inflation to non-food items has been and will continue to remain a cause of serious concern. RBI by raising the interest rates has done the correct thing to try to contain the non-food inflation but I feel RBI will need to be a little more aggressive.

While the recovery in the GDP’s is quite broad based, the question that comes to my mind is can we sustain this level of GDP growth rate in view of the fact that the sentiment at the consumer level has not really gone up.  Whatever growth we have seen is primarily due to the reduced interest rates that the banks have offered to consumers & consequently the increased demand.  The share of expenditure on food items is gradually declining which is a sign of a transition towards growth in the economy.  The service sector which has been the engine for growth of India has shown a decline in the growth rate & in the coming months with the cost structure that the Indian economy is getting into it would be difficult for us to sustain a robust growth rate in this sector.

 The major reason for the buoyancy in the markets has been the inflow of hot money from the west.  This inflow of cashmay not last long once the central banks in the west start increasing their interest rates and the regime of loose money is rolled back. The inflation’s that we may see in the coming months may show a decline but that would be mainly due to the base effect & the ground reality would be very different from what the figures would project.

The world economies have still not shown a definite improvement in their structure.  We still have countries like Greece & Portugal who are struggling & struggling hard to come out of the effects of the economic downturn. To sum up the current fiscal, it was a great year with lot of optimism and it can be sustained provided we are able to take care of the inflation and the supply side constraints.

By:

 

Economist, Siddharth Shankar

Kassa Financial Services