This may be symbolic in terms of the coming of age of the Indian economy, and will place on it the responsibility of consolidating its place in the world economy.

The over-riding theme for the Indian economy in 2007 seems to have been the consolidation of the idea of globalisation. Indian economic players seem to have moved from the notion of just fitting-in to the world economy towards the idea of making strategic in-roads into it. An obvious metric of this idea is the size of merger & acquisitions (M&A) deals struck during the year.

Big deals in 2007

The year 2007 started with the finalisation of the Tata – Corus deal, and till August 2007, the economy had already witnessed 460 M&As, 267 Private Equity (PE) deals totaling to 727 deals as compared to 782 in the entire year 2006. These deals comprise of inbound, outbound and domestic M&As and private equity deals.

Another example has been the march of the Bombay Stock Exchange Sensex, which has risen almost 38 per cent since the start of the year to December, led in a large way by net Foreign Institutional Investment inflows, which stood at around Rs 31,300 crore during the year 2007.

These quantum of inflows have meant that India had to grapple with the issues of an open economy, and the management of the monetary policy involved the fine balancing of the exchange rate, interest rates and inflation. Given this, the idea of de-coupling seems to be debatable, as this aggressive integration with the world economy is likely to play out in the coming year.

Estimates of World economic growth for 2008 by the World Bank stand at 3.6 per cent, which is slightly higher than 3.3 per cent expected in 2007. It is expected that growth in Europe and Japan will mitigate any slow down of growth in the US economy, which itself is expected to eliminate the drag from the housing sector, thus leading to a revival in investments.

Therefore, given these estimates, it would seem that any risks to India’s economy from global growth fortunes are likely to be minimal. This is as much owing to the reasonably positive prospects, as well as to the fundamental domestic resilience of the Indian economy. 

Looking ahead

D&B’s expectation for India’s GDP growth rate for FY09 stands between 8.7 to 8.8 per cent, following expectations of growth of 8.7 per cent for FY08. We expect that industry will grow by 9.8 per cent in FY09 and services by close to 10 per cent in FY09.

We expect to see a continuation in investment buoyancy; D&B expects Investment (as a percentage of GDP) to be close to 37 per cent in FY09, financed by savings of approximately 35.5 per cent of GDP in FY09. On the exports front, certain export-oriented sectors such as textiles & garments have felt the heat of the appreciating Rupee in the year gone past.

We expect that by the end of 2008, we would witness only a marginal appreciation of the Rupee versus the dollar and would settle around 39.2 – 39.4.

Given this, we expect that most sectors would have factored in the stronger Rupee, and exports will grow by close to 20 per cent (in dollar terms) in FY09; imports will be marginally higher at around 25 per cent.

Curbing inflation

On the inflation front, 2007 brought about monetary tightening early in the year to bring inflation under control. The policy seems to have succeeded in achieving its goal, with inflation (WPI) averaging at about 3 per cent over October to November 2007.

However, given that much of the high cost of crude oil has not been passed through, we expect that inflation will touch 5 per cent by March 2008. At present, money supply continues to be well above the intended rate; therefore, we expect to see a CRR hike in January or April 2008.

However, we expect that money supply will come down to 18 per cent by end of 2008, as interest rates impact credit lending. Capital inflows, the other much discussed source of funds into the Indian economy in 2007, had intensified the issues of regulating money supply in the economy, particularly given the Rupee-Export sensitivity.

The policy makers’ ability to continue to absorb these flows is limited due to the possible fiscal impacts. We believe that policy efforts towards liberalising capital outflows may gain some momentum in the coming year. On the other hand, it is also possible that capital inflows into India in 2008 may be affected due to the subprime crisis.

The writer is the Chief Operating Officer, Dun & Bradstreet India. Source: India Infoline News