5 things that can go right for India's economy in 2012

Terrible. That’s how 2011 was for the Indian economy.

Economic growth slowed to a crawl, the rupee plunged to a fresh low, foreign investments all but dried up and government action on economic and political reforms practically came to a standstill as it battled one corruption scandal after another.

For the pessimist, there’s plenty to be worried about as we head into 2012.But there are reasons to be cautiously optimistic too.

After all, it’s a new year - a time for renewed hope.

Firstpost lists five reasons why India could have a moderately better New Year:

One, India’s gross domestic product will continue to grow in 2012, albeit at a much slower rate of below 7 percent. While that is, admittedly, disappointing for a country that aims to roar ahead in double-digits, it’s still better than the growth rate of the global economy, which is predicted to expand by about 3.5 percent next year. Plus, India’s growth will rank second only to China among the group of BRIC - Brazil, Russia, India and China - nations.

[caption id=“attachment_160702” align=“alignleft” width=“380” caption=“a slowdown in consumer spending, which grew by a mere 5.9 percent in the September-ended quarter, might be close to hitting bottom. BeyondElements/Flickr”] [/caption]

While China is expected to grow by about 8.1-8.4 percent, Brazil’s and Russia’s economies are expected to expand by less than 4 percent in 2012. So, maybe we’re not that badly-off?

Two, we’ve probably reached a turning point on interest rates. That means the economic pain we’re enduring now has probably reached its peak. The next move by the Reserve Bank of India is likely to be a policy rate cut early next year. That could help breath some life into the sluggish economy by lifting credit demand for investment and spending. It will cheer stock markets as well.

Globally, countries ranging from Brazil and Australia to Indonesia and China have cut rates on the back of weakening inflation and growth expectations. Low interest regimes in economies across the globe are likely to fuel growth going ahead.

Three, a slowdown in consumer spending, which grew by a mere 5.9 percent in the September-ended quarter, might be close to hitting bottom. Domestic spending accounts for about 60 percent of economic activity, so it’s quite an important gauge of economic health. A cut in interest rates could certainly revive sentiment and boost spending, which should lift demand for services and sectors across the board.

Four, the stock markets are currently in a bear phase (down more than 20 percent from their previous peaks). For the brave-hearted, it’s not such a bad time to buy, although caution might be warranted in the short term. As a Firstpost article noted, “bear markets tend to depress prices more than warranted and that, in itself, is a natural risk control mechanism. Downside risk at every level becomes lower.” The article also noted that the extreme pessimism over India is now similar to the extreme optimism seen during the bull run of 2007.

While the Sensex could fall another 25 percent from current levels, given our inherent long-term potential of the economy, the markets have to rebound sooner or later.

Five, the economy has been backed into such a tight spot that the government may have little choice but to introduce economic reforms. A recent CLSA report also noted that if the Sensex falls to 11,000-12,000 and the rupee tumbles to 60 against the dollar, the ensuing ’noise’ from the media and India Inc would force the government into some sort of reformative action. That could present investors with a buying opportunity, the brokerage added.

In other words, something good might emerge from all the bad stuff that’s happened to the economy after all.