India faces economic challenge

India faces economic challenge

The story of India's economic slowdown mirrors that of other emerging markets, such as Russia and Brazil. The cyclical conditions of the global downturn have meant that gone are the heady days of GDP growth in excess of 7%. Nevertheless, India's demographic profile means the country still offers significant potential for food manufacturers. Katy Askew reports.

The first decade of this century was a golden age for Indian economic growth. The economy expanded at an average annual rate of 7.2% between 2000 and 2010. Service industries contributed 63% of this growth and facilitated urbanisation and the rapid expansion of India's middle classes.

A strong economic showing saw people benefit from rising income levels, making the middle class the fastest growing segment of the Indian population. According to the World Bank, India's gross national income per capita increased to US$3,840 in 2012, up from $1,830 in 2003.

Meanwhile, according to United Nations figures, city dwellers accounted for 31.6% of India's total population in 2012. Between 2010-15 the urban population is expected to grow by 2.5%, above the 1.3% growth expected in the total population.

Higher personal incomes and growing urbanisation mean Indian middle class consumers represent a significant consumer market for food manufacturers. Urbanisation, growing discretionary spending power and high female participation in the workplace have stimulated growing demand for value-added processed, packaged foods.

The sheer size of India's population also means demand for food products is strong. The UN places India's population at 1.24bn - behind only China in size. "India is a destination where anything produced will be consumed due to the size of its population," Anil Talreja, partner at Deloitte Haskins & Sells, tells just-food.

For all its potential, however, India's economy has been marked by an economic slowdown since the 2008 global economic crisis struck.

This week's figures from the Reserve Bank of India (RBI) make for sobering reading. In its Macroeconomic and Monetary Developments Second Quarter Review 2013-14, a survey of independent forecasters, the RBI lowered its forecast for 2013-14 GDP growth.

"The median growth forecast for 2013-14 was revised downwards to 4.8% from 5.7 % in the previous round, which is lower than the growth of 5% registered during 2012-13," the RBI report stated.

The RBI suggested that after a slow first half - with first-quarter growth at its lowest level for move than four years - conditions would ease and growth would pick up in the final six months of the year. In particular, RBI pointed to an expected improvement in agricultural output due to favourable weather.

"Growth has slackened to a 17-quarter low of 4.4% during first quarter of 2013-14. On current reckoning, growth in 2013-14 is likely to stay at about the level of last year," the central bank said. "After a slower H1, a modest recovery is likely in H2 of 2013-14. This is expected to come from a rebound in agricultural growth backed by a better than normal south-west monsoon and a pick-up in exports."

The IMF has taken a more negative view of India's outlook, projecting GDP growth of just 3.75% in 2013 compared to its previous forecast of 5.7%. Lacklustre activity in manufacturing and services is expected to offset higher agricultural output, the IMF said earlier this month. The Asian Development Bank also lowered India's growth projection for 2013-14, dropping to 4.7% from 6%.

Since the onset of the economic crisis, middle class households have been hit by job losses and wealth erosion as property prices have dropped. Easy credit prior to the downturn have left some with difficulties in repaying credit cards and personal loans.

In this context, inflation - driven by high levels of food inflation - has become a significant challenge for the RBI. Rising food prices have pushed the country's inflation rate up to 6.46% in the most recent quarter, missing the central bank's inflation target of 5%.

Demographic demand drivers have meant that the supply of food products has struggled to keep pace with demand in recent years. The result has been soaring food prices. Average food inflation hit 12.24% in the first half of the current fiscal, primarily due to a 38% spike in vegetable prices. Concern that fruit prices will follow suit mean commentators are readying for further food price inflation in the remainder of the year.

"On inflation, both wholesale and consumer price inflation are likely to remain elevated in the months ahead," Dr. Raghuram Rajan, RBI governor, said.

The RBI has taken steps to attempt to curve inflationary pressures, such as maintaining stability in the balance of payments and raising interest rates. In raising interest rates, the bank hopes to moderately curb demand while supply catches up.

"It is important to break the spiral of rising price pressures in order to curb the erosion of financial saving and strengthen the foundations of growth. It is in this context that the LAF repo rate has been increased by 25 basis points. Curbing mounting inflationary pressures and managing inflation expectations will help strengthen the environment for growth by fostering macroeconomic and financial stability," Rajan explained.

The squeeze on consumer spending power has meant many households have cut back on discretionary spending, Talreja says. "People are spending, but on basic necessities. They are cutting back on luxury items. Food sales are holding up, but luxury products are being squeezed," he observes.

While the RBI has moved to ease inflation, with a general election on the horizon in early 2014 the central government has been less aggressive in its response to the downturn.

According to the IMF's assessment, the Indian government's laggardly response to tackle infrastructure and regulatory bottlenecks has worked to the detriment of the Indian economy. "Further downward revision of growth forecasts... reflects persistent supply constraints and slow progress on structural reforms," the IMF said in its update on the Asia Pacific region.

The Indian government has made some moves towards liberalisation - such as the relaxation of FDI in retail. There are also a number of fiscal policies that are still to be enacted, such as changes to taxation and stock exchange controls.

However, progress has been slow and much will depend on the outcome of the looming general election.

On the one hand, if either the right-leaning BJP political party or left-leaning Congress Party gain power, it is likely varying degrees of a more combative reform agenda will follow. On the other, if a coalition of regional governments - which have historically moved to block reforms such as FDI in retail - wins through, it seems less likely the reforms needed to stimulate growth will be supported. 

Regardless of who emerges victorious in next year's elections, it is clear there will be no big-bang legislation until the issue is decided.