The global economic growth is expected to slow down further in 2012 and 2013 pointing that world is on the brink of another recession, according to UN 'World-Economic Situation and Prospects 2012' report.
Even emerging powerhouses like India and China, which led the recovery last time, will get bogged down.
The problems stalking the global economy are multiple and interconnected. The most pressing challenges are the continued jobs crisis and the declining prospects for economic growth, especially in the developed countries. As unemployment remains high at nearly 10% and incomes stagnate, the recovery is stalling in the short run because of the lack of aggregate demand.
Accroding to the reports, GDP growth in China and India is expected to "remain robust, but to decelerate".
India's economy is expected to expand by between 7.7 per cent and 7.9 per cent in 2012-2013, down from 9.0 per cent in 2010. In China, growth slowed from 10.4 per cent in 2010 to 9.3 per cent in 2011 and is projected to slow further to below 9 per cent in 2012-2013.
Meanwhile, developing countries, which had rebounded strongly from the global recession of 2009, would be hit through trade and financial channels. The financial turmoil following the August 2011 political wrangling in the United States regarding the debt ceiling and the deepening of the euro zone debt crisis also caused a contagious sell-off in equity markets in several major developing countries, leading to sudden withdrawals of capital and pressure on their currencies.
"All of these weaknesses are present and reinforce each other, but a further worsening of one of them could set off a vicious circle leading to severe financial turmoil and a renewed global recession for 2012-2013," the report said.
Who does not want to see their strong capital appreciation when it comes to investing in stocks. But among this present crisis of market volatility (where Sensex has tumbled 11% since beginning of the year), high inflation rates, weakening rupee, slowing down of GDP and country plagued with corruption allegations; I think investors shall be rather pessimistically invest in shares. These are hard time for stock market and looking at capital appreciation shall be done with only a long distant perspective. Eurozone crisis is staring straight at us and not many of the experts has any short term answers.
Growth prospects of India in particular is looking very bleak (in short term). In last few months FII’s has fled the market like they have seen the ghost. Indian government has taken the step to attract foreign funds into the market by allowing foreign investors open demat and online trading accounts in India. Earlier only institutional foreign investors were allowed to invest in India through mutual fund route. But now with liberalization of the Indian stocks market it is likely that that foreign funds may flow in. But if this will happen in short term I am not sure as Indian Economy is showing very weak fundamentals. High inflation and slowing GDP is certainly not helping.
Among this mood of gloom prevailing in Indian market, there are hidden signs of optimism. Majority of quality stocks are trading at very attractive price levels. In short term (< 3 years) you cannot expect much of capital appreciation but in long term (> 3 years) reasonable capital appreciation is almost a certainty. Even some stocks are trading at such price levels that dividend yield can be achieved well over 5% per annum. Some companies like Tata Steel, ONGC, Tata Motors, TCS etc which has strong dividend payout history is trading at undervalued price levels. When I say undervalued price levels I means that at these price levels you can be sure to get reasonable capital appreciation in medium term holdings. These are some high dividend yielding stocks that are trading at such price levels that the in long term substantial dividend inflow (…read more on divided compounding) is possible to the tune of 7%-8% per annum. This is a moment when we can really tap some quality high dividend yielding stocks.
The present market scenario is confusing. I am not able to see the recovery path for Indian economy unless the world (Europe) business flourishes. Weakening Indian Rupee is creating a huge expense burden on manufacturing sector of India. High Inflation rates are effecting purchasing power of Indian consumers. Slowing GDP is not helping the Indian Growth story. So all in all the market scenario is not good for short term investing. But when it comes to long term, probably it is best investing time for investors. Not many of us are experts of stock analysis but the present global meltdown is giving us opportunity to bag some most valued stocks at amazing price levels. It is a fact that we Europe of not doing well, United States is still on recovery path and fundamentals of Indian market is not as strong, but the present crisis is giving is more opportunity of portfolio creation in long term than misfortune.
News that GDP growth has slowed considerably to 5.3 per cent in the fourth quarter of 2011-12, as compared with 9.2 per cent in the corresponding quarter of the previous year, could not have come at a worse time for the government. While quarterly GDP estimates tend to be revised substantially, the evidence that the GDP growth rate has been consistently declining over the four quarters of the last financial year and that the fourth quarter rate is the lowest in nine years makes it imperative for the government to respond.
However, other aspects of the emerging economic scenario make the choice of that response difficult. There are three disconcerting aspects of that scenario that are being widely referred to. The first is inflation, which had moderated and the government was hoping would just go away. However, the annual month-on-month rate of inflation as measured by the national Consumer Price Index had risen to 10.4 in April, from 9.4 per cent in March, 8.8 per cent in February and 7.7 per cent in January. Hence, the government may find it difficult to persuade the Reserve Bank of India to announce a substantial reduction in interest rates in order to spur growth. Even if the impact of a reduction of interest rates on growth is not likely to be dramatic, such a move would have served to signal decisive action.
The second is the evidence that lower export growth resulting from the global recession combined with a rising bill on account of both oil and non-oil imports is widening the trade and current account deficits with attendant adverse effects on GDP growth. The deficit in the net exports component of GDP has risen from around Rs 316,000 to Rs. 413,000, and contributes to dampening rather than facilitating growth.
Thirdly, international investors are being less enthusiastic about investing in India, partly because of challenges they are facing elsewhere in the world. That is adversely affecting the rupee that is already weakened by the rising current account deficit, leading to s sharp depreciation of the currency.
These features of the current scenario are hindering the government’s resort to the most obvious countercyclical response to recession -- an increase in spending as at the time of the 2008 recession. If everything else remains the same, an increase in spending would require accommodating a larger fiscal deficit than would have otherwise been the case. This, the fiscal conservatives argue, is unacceptable, because of the already high level of the fiscal deficit, placed at 5.8 per cent of GDP in 2011-12. Moreover, influenced by the misplaced view that a higher fiscal deficit necessarily results in higher inflation, they warn of the dangers of hiking the fiscal deficit in an already inflationary environment. The government, given its own predilections is inclined to agree. It is also concerned that foreign investors would disapprove of a higher deficit, turning investor reticence into investor flight.
So increased spending would be acceptable only if it does not setback the government’s commitment to significantly reduce the fiscal deficit to GDP ratio in the near future -- a task made difficult by the slowdown in GDP growth. In normal circumstances this would mean that the government would have to raise more resources through taxation to finance spending aimed at reviving the economy. But times have not been normal for some time now because of the campaign to freeze and reduce direct taxation. Taxes, argue the rich and the corporate sector, create disincentives to save and invest and must, therefore, be kept to the minimum. The government too seems convinced, possibly with reason, that more taxes on corporate incomes and stock market returns would adversely affect foreign investor sentiment. So talk of mobilising resources through higher taxation is avoided.
This, of course, leaves the problem at hand unresolved. How should the government respond to the downturn that threatens to take the economy into a recession? One answer avoids the question by holding that all would be well if the government is able to continue with reform and even achieve its deficit reduction targets. That argument, if meaningful at all, must be based on the presumptions that growth is slowing because private investment is down, and that investment is falling because the slackening of the pace of reform has discouraged private investors. This is indeed a strange argument because it suggests that while reforms in the past have spurred investment and growth, that reform, even when not reversed, cannot keep investment going. Only a process of never-ending reform can consistently drive investment.
Recognising the problem with such an argument, a completely different package is being put forward by a section of the business community to revive growth without hurting corporate interests. They advocate a step up in public expenditure, especially investment, to revive demand and growth, but hold that such an increase in expenditure should not b financed with borrowing or taxation, but by a reduction in subsidies. The “strength” of that argument lies in the fact (see Chart) that recent increases in the central fiscal deficit to GDP ratio have been accompanied and partly “explained” by increases in the ratio of major subsidies to GDP. So if subsidies can be substantially reduced, it is asserted, it should be possible to step up investment expenditure without increasing the fiscal deficit.
What is being ignored here is the impact of a reduction in subsidies. In 2011-12, subsidies on food and petroleum together accounted for 70 per cent of the outlay on major subsidies (on fertiliser, food, petroleum and interest). These are the subsidies that would have to be reduced if expenditure is to be significantly curtailed. However, neither of these subsidies are easily cut. Reducing food subsidies is near impossible given the government’s commitment to substantially increase the population’s access to subsidised food, with even the diluted Food Security Bill promising to cover 70 per cent of the population. Going back on that commitment when inflation is high and growth slowing would be amount to betrayal of a majority that has been left in malnutrition at the margins of subsistence.
Further, in recent times the increase in the subsidy bill has been more on account of petroleum than food, because of increases in international oil prices. The share of the petroleum subsidies in outlays on major subsidies rose from less then 6 per cent between 2004-05 and 2008-09 to as much as 34 per cent in 2011-12. So curtailing the subsidy bill would require a sharp increase in the prices of petroleum products in the manner done recently with petrol. Being universal intermediates, such an increase in the price of petroleum products would accelerate the current inflation in the prices of necessities. That would not just be politically suicidal but also detrimental to growth.
The implication is clear. The government would have to find ways of financing an increase in expenditure to counter the downturn, while addressing with separate policies any impact this may have on inflation or the balance of payments. But with strong interests working against the choice of such a policy package, there is a real danger that nothing would be actually done. That would take the economy into the recession that it had managed to stall since the onset of the global crisis in 2008.
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