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FINANCIAL SCENE

Focus turns to economic growth prospects financial scene

India’s growth prospects over the near term have been in focus recently. The worsening global economic crisis has naturally raised concerns here too but on several other parameters there are reasons to be hopeful. The Indian economy is more globalised than ever before. Hence the problems of the developed countries are increasingly felt here.

On the other side, there is subdued optimism over growth prospects even in the face of such extraordinary turmoil. It is true that along with the rest of the world, India’s performance will not match its recent record. The slowdown will affect the economy but at the end of the day there would be evidence of solid growth, which will be rivalled only by China.

This year there have been special challenges before those who forecast India’s GDP growth. Just as challenging has been the task of interpreting the forecasts. In an extremely difficult economic environment — on this there is a consensus — can the economy do better than what official statistics suggest?

On February 9, the CSO in its advance estimate placed India’s GDP growth for the current year at 7.1 per cent. Earlier in November it had estimated growth during the first half (April-September 2008) at 7.8 per cent. So, economic growth during the second half should be around 6.4 per cent if the CSO’s forecast is to come true.

Figures for the third quarter (October-December 2008) have not yet been released but all available data point to a slowdown. Monthly figures of exports during this quarter show a negative growth. The IIP (Index of Industrial Production) numbers clearly indicate the strain the manufacturing sector is facing. The latest IIP numbers — for December — reveal a contraction in industrial output by 2 per cent even as stronger negative signals emanate from the global economy. Policy makers in the U.S. and other developed countries are desperately trying to fix their financial sectors.

Expectations that the Indian economy is ‘decoupled’ from the West have been completely belied. The stock markets’ sharp declines in response to global cues were the first indications of global developments retaining their hold over Indian markets. But there are other pointers as well. Foreign institutional investors are pulling out to shore up their balance sheets back home. The current account deficit is widening. Remittances and earnings from software exports that had propped up the current account in the past show signs of declining. Software exports to the U.S. are under strain, although IT majors think they can tide over the present crisis caused by the near collapse of the banking system in the U.S.

The IMF, the World Bank and other institutions have in quick succession downgraded their growth forecasts for the global economy as well as specific regions and countries. According to the IMF the Indian economy will grow by 5 per cent during 2009. To put this in a proper context global economy will clock a mere 0.5 per cent growth during the same period. The economies of the U.S., the EU and Japan are forecast to contract.

A similar trend of lowering the growth forecasts is seen in actions of professional forecasters in India. According to the RBI which publishes these data ahead of the quarterly credit policy statement, the median forecast of professional forecasters (for the current year) was 8.1 per cent in April. It came down to 7.9 per cent in July and to 7.7 per cent in October and then to 6.8 per cent in January 2009.

In its recent third quarter review, the RBI has lowered its expectations from 7.5 per cent to 7 per cent with “a downward bias”. The Prime Minister’s Economic Advisory Council has forecast a 7.1 per cent growth down from its earlier 7.7 per cent. Those who think that the economy can defy these downgrades and the succession of bad news are counting on the following: (1) The methodology of collecting statistics: There is a strong possibility of the CSO revising its advance estimate upwards as has happened many times before in the past.

(2) Official statistics do not recognise certain favourable developments: According to the CSO a 7.1 per cent growth is possible despite agriculture and industry growing at much lower rates than last year. Industrial growth is projected to decline from 8.10 per cent last year to 4.82 per cent this year and agriculture growth from 4.86 to 2.61 per cent. Within industry, manufacturing and construction will fare much worse: manufacturing is expected to be down to 4.14 per cent from 8.20 per cent in 2007-08 and construction to 6.46 per cent from 10.11 per cent. Some analysts feel that the CSO’s assessment does not take into account certain developments that would favour manufacturing and construction. The fact that the demand for cement continues unabated even in these days of slowdown is seen to be a positive factor.

Perhaps more importantly, the banking sector is in robust shape in India unlike in the West where it has virtually collapsed. Credit growth in the aggregate has been satisfactory although some sectors feel deprived. The implication is that when business confidence revives, banks would be there to fund viable projects.

(3) The services sector is expected to grow by 9.60 per cent, lower than the 10.85 per cent last year. The most significant contributor is “Community, social and personal services” that expanded by 9.28 per cent compared with 6.79 per cent a year ago. This sub-sector has the potential to grow even more as it captures government expenditure, including the Sixth Pay Commission award, the stimulus packages and grants for expenditure approved in October 2008. According to one view official statistics might not have captured the full impact of government spending.

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