India: Rapid Recovery and Stronger Growth after the Crisis
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the global commodity shocks that led to lower aggregate demand because of tighter monetary policy measures; and stresses of the 2008 global economic crisis, which led to problems in trade and financing (slower credit growth, falling FII, and falling stock prices).
Looking at the broader picture, financing is much less an aggregate macroeconomic constraint, since large domestic savings are easily available— primarily from household and corporate savings. The biggest immediate driver of investment appears to be confidence in domestic and foreign markets. We see good reasons to expect that annual investment growth rates, which fell from a peak of about 17 percent in FY06 to a low of about 4 percent in FY09, should recover rapidly to a sustainable level of about 12 percent annually in the medium term. Household domestic savings continue to be high (reflecting demographics), and corporate profitability has been buoyant even with the downturn because of scale and efficiency improvements. The stock markets, in turn, have recovered to their near-historic highs and are above FY08 levels (although still below their peaks), largely because of the inherent strengths of corporate balance sheets and growth prospects. Monetary policy will aid the recovery, since real interest rates have been lowered sharply globally, and Indian interest rates will follow that parity condition with lower country risks. A sustainable real deposit rate in India of about 2–3 percent will be consistent with buoyant investment (and consumption) demand. Some policy shocks are always possible, and are likely to be more on the upside (lower real interest rates) than on the downside (sudden monetary policy tightening to deal with inflation), given slower global growth and low interest rates abroad. The role of foreign portfolio preferences is also likely to remain strongly positive with the prospect of faster growth in India relative to the rest of the world. Investment prospects also depend heavily on rising aggregate growth and demand. With immediate growth prospects ahead of about 8–9 percent for real GDP, profitability will be reasonably high (as is currently evident). On the supply side, wages have moderated, and two years’ worth of cumulative skills supply should prevent immediate skill shortages. We also expect that infrastructure bottlenecks will be eased,
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