10 big risks India's weakening economy faces this year

What a way to start the new financial year. If you thought fiscal 2012 (April-March) was bad, think again: fiscal 2013 could be much worse.

After ending last year at an estimated 6.9 percent, the Indian economy is forecast to grow around 7.5 percent this year. But that was before the rupee, inflation and foreign tax issues started playing truant.

Here are 10 key big risks that face the weakening Indian economy this year.

**Flailing rupee:**Estimating the rupee’s value against the dollar is probably the most useless thing to do right now because the currency is on a roller-coaster ride. Investors beware, you could get motion sickness from all those gyrations. After hitting an all-time low of 54.30 against the dollar in December 2011, the rupee clawed its way back to 48.60 in early February. Now, it’s back to 51 levels against the greenback.

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It’s quite possible the rupee could tumble to new lows in coming months given the numerous risks surrounding the economy.

Widening current account deficit: India’s current account deficit (CAD) in the third quarter (October-December) widened to 4.3 percent of GDP. For the April-December period, the CAD stood at 4 percent of GDP. The CAD represents the difference between exports and imports after considering cash remittance and payments.

The higher the CAD, the greater the need for foreign capital inflows - and greater the pressure on the rupee. With exports only expected to pick up mildly in the new financial year starting 1 April, expect the CAD to keep bullying the rupee. Yes, our CAD is bad.

[caption id=“attachment_266347” align=“alignleft” width=“380” caption=“After slipping to 6.95 percent in January, the wholesale price index looks set to rise again. AFP”]  [/caption]

Resurgence of inflation: Will prices ever fall in India? After slipping to 6.95 percent in January, the wholesale price index looks set to rise again. Service and excise taxes have been hiked, along with freight rates. Food prices are forecast to rise again and a hike in fuel prices is imminent. The government didn’t exactly overwhelm us with grand fiscal tightening measures either.

High inflation = high interest rates and low economic growth.

**Receding interest rate cut hopes:**Untamed inflation will cause the Reserve Bank of India to hold back on cutting interest rates. At the beginning of the year, most brokerages had estimated rates would be cut by up to 150 basis points in 2012.

Not any more. The most that can be expected now seems to be cuts of up to 75 basis points. For more clues on what’s next, watch out for the RBI’s policy review statement on 17 April.

Growing fears over capital inflows: How long will foreigners continue to believe in the India growth (what?!) story? Especially since it seems like, of late, the government has been trying especially hard to drive away foreign investors. Proposals to tax offshore deals retrospectively, as well transactions/deals that were done to ‘avoid tax’ have spurred loud protests from foreign investors, who have invested more than $9 billion in capital markets since the start of this year on hopes of an improving economic environment and rate cuts. Will they be peeved enough to dump Indian investments this year? Let’s hope not.

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No movement on economic reforms: A government battling one scandal after another - at the moment, it’s Coalgate, Truckgate and rumours of an army ‘coup’ (!) - is in no position to push through any sort of economic reforms. A politically weak UPA is too busy firefighting and containing the fallout of the numerous scams seen during its tenure.

The government also has very little money to boost the economy itself through investments, and a high fiscal deficit (estimated at 5.1 percent for fiscal 2013) will limit its appetite to spend freely to boost consumption. If anything, austerity in some form may be on the way.

Meanwhile, sectors ranging from power to aviation hang in limbo as they await progress on numerous issues. Given the ruckus that occurs every time Parliament is in session, they might be waiting a long, long time.

**Rising oil prices:**Probably one of the biggest external threats to India’s economic recovery. Oil prices are surging and threaten to rip apart the currency and CAD. Crude oil is India’s biggest import item and the country imports more than 80 percent of its annual requirements.

High oil prices have a dual impact: they increase the subsidy bill of the government and force fuel hikes, which lead to an overall increase in prices. They also increase our imports bill - and demand for foreign currency to pay for those imports. Talk about getting hit on all sides.

**Deteriorating corporate earnings:**Corporate India has little to celebrate in the new financial year. Net profit margins, a key measure of corporate profitability, continue to decline. A Crisil analysis of the financial performance of 227 companies across 26 industries (excluding banks and oil companies) for the quarter ending March noted that operating profit margins will decline by 200-250 basis points because of slower volume growth, high input costs and limited pricing flexibility. Net profit margins will show a sharper decline, it said.

Revenue growth is also expected to be subdued, at around 15 percent, compared with the 25.5 percent growth in the December-ending quarter. With the corporate default rate also hitting a 10-year high, there’s little that makes for cheerful reading.

**Bank loans turning sour:**Indian bankers will have to keep their aspirin strips close by because this year promises to give them quite a few headaches.With declining profit margins, several companies are struggling to repay their loans. In other cases, a lack of sector reforms (aviation and power) will threaten to spill red ink on banks’ balance sheets. It will be a constant battle for banks to keep their bad loans under control.

According to Crisil data, gross non-performing assets (bad loans) of banks climbed from 2.3 percent of total advances on March 2011 to 2.9 percent by December 2011. Slow economic growth and relatively high interest rates will keep credit growth low, while asset quality and earnings are also likely to remain weak.

**Uncertain global environment:**Nearly four years after the global credit crisis erupted, it’s safe to say that very few of us know where the global economy is headed. The US economy is standing on the brink of a recession after a wimpy recovery, while the eurozone just can’t seem to give up its addiction for gigantic sovereign debt – or austerity. China’s economy, meanwhile, seems to be running out of steam. In such an uncertain environment, and of course because of all the problems listed above, India’s economy is expected to remain leashed around 7.5 percent.

And that, ladies and gentlemen, is how India enters the new financial year.