This is an article written by Magnus Prim, SEB Singapore Branch about the economical situation in India.

1. Incredible India
India’s economy has impressed in the face of a very severe global recession,
bottoming out at a still solid 5.8% y/y growth rate, and now recovering nicely with the
September -09 quarter posting 7.9% despite some local challenges in the form of a
weak monsoon and rising oil prices. What has made this astonishing performance
possible?
Helping factors
There are several reasons why India has been able to perform as strongly as it has.
Most importantly India is less vulnerable to external shocks because it has low
exposure to trade. Presently India’s exports stand at around 20% of GDP whereas few
other Asian countries have a ratio below 50% and some well over 100%. This has
provided India with significant insulation against the drop in external demand that hit
other Asian nations so hard. On top of this, Indian banks were generally not exposed
to the troubled portions of the global financial system and remained largely unaffected
by a development that roiled large parts of the global financial system. Finally, there
was also some luck involved. When the crisis hit it was an election year in India
which, true to form, meant that fiscal spending was already higher than it usually is (a
common and well accepted way to “buy votes” ahead of an election). Thus, there was
no lag between a need for fiscal stimulus and its implementation when the crisis hit
and this certainly served to hold consumption up much better than would otherwise
have been the case.

2. Potential risks going forward
Even though India has handled this externally shock impressively well there are still a
range of potential risks going forward. The two most important are likely to be the
strained fiscal situation and monetary policy constraints. Although the overall debt
levels for India are not extremely high compared with many other countries, its
running deficits are certainly a big concern. Deficit targets have repeatedly been
postponed while off-budget activities have tended to increase. Indeed, if the crisis
would have proved longer India might not have been able to continue to provide the
necessary fiscal stimulus. The risk regarding monetary policy is mainly that there are
indications rates will remain low for too long. Inflation is already picking up in India
and will be significantly above the central bank target and still it is not a done deal
that the bank will act forcefully enough due to an apparent central bank preference to
rate support to the economy higher than keeping inflation under control.
Outlook
Still, even though there may be some risks to the outlook and there may have been
some degree of luck involved in how well India survived the crisis, it is clear that
India stands well positioned to benefit from a global recovery and maintain and build
on the positive momentum it was able to keep throughout this economic crisis. We are
looking for GDP growth at 8% this year.