Slowing down?

Even as overseas funds continue to rush into India, Indians themselves are wondering what is happening to the economy? The half full or empty glass conundrum may well be the answer to this question. Demand is definitely softening in some sectors, leading to fears of a slowdown. Higher interest rates combined with other factors have ensured that demand remains subdued.

However, the broad macro-economic indicators point to a less worrying scenario. Inflation has dropped to 3.26 per cent by the end of September, well within RBI’s tolerance limit; industrial production figures—after giving a bad scare in July, when it dipped to 7.1 per cent compared to 13.2 per cent in July 2006—seem to have bounced back. The Index of Industrial Production rose 10.7 per cent in August this year, compared to 10.3 per cent in August last. The investment rate continues to be high and interest rates stable. The fiscal situation, despite the issue of oil bonds, also seems manageable. Economists such as Saumitra Chaudhuri, Economic Adviser at ICRA and member of the Prime Minister’s Economic Advisory Council, believe there can hardly be an overall slowdown when the broad macro-economic indicators are so robust. “Sure, there is some slowing down in consumer durables, but industrial production is growing, so are agriculture and the services exports,” Chaudhuri says. Many will agree with him. Key software services exporter Infosys Technologies posted an 18 per cent increase in its profits in Q2 this financial year compared to the previous corresponding period.

The half-empty glass viewpoint sees the August IIP data as proof of falling demand for consumer goods. Production of textile products was down as a result of the rising rupee. What can one conclude from this? “The growth impetus is shifting from consumer goods to investment goods,” says Chaudhuri. Sanjay Prakash, CEO, HSBC Mutual Fund, agrees with this view. “India’s long-term story is certainly intact, though there may be a growth moderation in some sectors,” he says. And that is what global fund managers are also concluding, as is evident from the deluge of fund inflows into the country.

Currency appreciation and high interest rates—often cited as culprits for the softening in the export and the leveraged economies— remain connected to these waves of capital washing up on our shores. The first waves hit immediately after the US Federal Reserve cut its rate by 50 basis points in September and accelerated thereafter. “The pace of capital inflows could be affected by any further changes by the Fed and the fallout of the US subprime crisis in the coming months,” says Prakash. That could well mean more funds inflows unless there are major shocks. “We need a strategy to absorb these flows without creating aberrations in the economy,” says Vimal Bhandari, Country Head, Aegon India, which is planning to set up a life insurance business in India.

Managing this cocktail of local and global factors to sustain the current growth rates will be a tough task. With crude oil and critical food prices at high levels, inflation could start rising again; long-term issues on the agriculture side need to be fixed; physical infrastructure that is needed to fulfill India’s promise also needs to be created. And human stock, which is critical for India to sustain the high growth rates remains bereft of appropriate education, health and other amenities. So, it is not unnatural for bad dreams of slowdown to haunt us. But the broad consensus among economists is: this is not a slowdown. Instead, it is just slight and expected moderation or a consolidation of recent growth rates. Shorn of jargon, that means GDP growth rates will probably moderate from over 9 per cent to somewhere around 8.5 per cent.