The economic environment continued to remain somber
in the year 2012. After a sharp decline in the global growth
momentum in the year 2011 to 4.0 percent from 5.3 percent
in the year 2010, the global growth declined further to 3.2
percent in the year 2012, barely above the recessionary
growth of 3 percent. One of the key reasons for the growth
slowdown was sharp decline in the growth of emerging
economies during the year to 5.1 percent against the
growth of 6.3 percent in the year 2011.
Number of positive policy actions taken during the year,
especially by the key policy makers of the advanced
economies would likely help in arresting this slide. These
actions also address a few major concerns including
the threat of a euro area breakup and the possibility of
triggering the “fiscal cliff” in the US leading to its sharp
fiscal contraction. Timely policy actions after a leadership
change in European Central Bank (ECB) and in a few of the
Euro member countries have resulted in bringing stability
to the region’s debt and currency market.
The global economy remains well supported by the
exceptionally benign monetary policy by central banks of
most advanced economies. These policy actions include
Fed’s open ended third round of quantitative easing,
ECB’s commitment to do whatever it takes to preserve
the euro and Japan’s USD 1.4 trillion quantitative easing.
The interest rates in all these economies continue to be
at a record low and in May 2013, ECB further reduced its
interest rates by 25bps to a new record low of 0.5 percent.
Another positive factor was the resilience and better than
the expected growth of the US economy. Despite a sharp
slowdown and lower than the projected growth of almost
all major economies, US grew much faster at 2.2 percent
against the projected growth of 2.1 percent in April 2012.
The US economy has been consistently building on its
slow yet steady growth momentum and the unemployment
rate in the US declined to a four year low of 7.6 percent in
Going forward, while there are several downside risks
that can derail the global growth momentum, the global
GDP growth is expected to increase slightly to 3.3 percent
during the year 2013 and more appreciably to 4.0 percent
in the year 2014.
During the fiscal 2012-13 (FY’13), Indian economic growth
continued to remain weak and the economy grew at a
decade low rate of less than 5 percent, much lower than
the estimated growth rate of 6.7 percent at the start of the
financial year and lower than the growth rate of 6.2 percent
and 9.3 percent achieved in the financial years 2011-2012
and 2010-2011, respectively.
During the financial year, especially in the first half, almost all
macroeconomic factors continued to deteriorate. Despite
a sharp slowdown in growth and Reserve Bank of India’s
(RBI) tough stance to keep interest rates high, the inflation,
especially the Consumer Price Index (CPI), remained in
double digits for almost the entire year. The negative real
rate of return pulled savings away from productive financial
assets into unproductive physical assets like gold, whic
led to an increase in the current account deficit. During the
year, India witnessed one of its highest current account
deficits with Q3FY13’s current account deficit widening
to 6.7 per cent of the GDP which is way above the often
stated comfortable level of 3 per cent of the GDP. Other
factors like high fiscal deficit and low corporate profitability
also contributed to the reduction in savings and increase in
the current account deficit.
During the year, the merchandise trade deficit increased
further from 10.2 percent to 10.9 percent of the GDP due to a decline in exports.
On the positive side, the government took a number of bold steps during the second half of the financial year that are expected to have a positive impact on the economy.
The government’s commitment to meet its guidance on the fiscal deficit number; consistently reduce fiscal deficit
by cutting subsidies and hence free up capital for the
more productive private sector; take constructive steps to
boost investor confidence and there-by to ensure sufficient
external funding to meet its current account deficit and
stability of rupee over the short-term, should gradually get the economy back into a higher growth momentum.