This slowdown is for real

There are now unmistakable signals that the Indian economy is losing steam. All indicators seem to point towards a slowdown in the offing. The Central Statistical Organisation (CSO), in its advance estimates for 2007-08, expects GDP to grow 8.7 per cent for the full year. It implies that during the second half of this year, the economy will grow at 8.4 per cent compared to 9 per cent in the first half. The CSO’s fresh projections are disturbing. It shows a drop of about one percentage point in GDP rowth rates this year (last year’s figure was 9.6 per cent). The current year’s estimate is the lowest in the last three years.

Worryingly, the macro picture seems to be the result of a broadbased slowdown affecting all sectors—agriculture, mining, manufacturing and services. Manufacturing has been hit the hardest, and has slowed to 9.4 per cent compared to 12 per cent in 2006-07. Consequently, industrial growth, too, has been impacted. CSO’s farm growth estimate, of 2.6 per cent, is also sharply down from last year’s figure of 3.8 per cent. Says Siddhartha Roy, Economic Adviser, Tata Group: “The manufacturing slowdown is a result of high interest rates. And the slowdown in the growth of food production is of particular concern, given the high global food prices. It could have an inflationary impact on the economy.”

This is only part of the story. There are warning signals from other sources as well. The Reserve Bank of India (RBI), too, has pointed out in its Third Quarter Review of the Macroeconomic and Monetary Developments that credit offtake growth has moderated this financial year.

Slowdown ahead? CSO estimates GDP growth at 8.7 per cent in 2007-08, down from 9.6 per cent last year Manufacturing hit the hardest Agriculture growth also falters. down significantly from previous year RBI estimates that credit offtake has moderated Concerns of a US slowdown significantly impacting exports Moody's and the World Bank lower growth estimates for India

Non-food credit extended by scheduled commercial banks expanded 22.2 per cent year-on-year as on January 4, 2008, compared to 31.9 per cent in the corresponding period last year. During April-November 2007, the infrastructure sector, too, recorded a lower growth of 6 per cent, against 8.9 per cent a year ago. Says Roy: “Credit offtake is dependent on what is happening in the overall economy. It clearly indicates that the economy is slowing down.” Adds Samiran Chakravarty, Chief Economist, ICICI Bank: “These levels of credit offtake are not enough to sustain high growth rates.”

There are other concerns as well—a slowdown in the US will have some impact on the domestic economy (see Coupling Conundrum, page 19). In a recent report, the Prime Minister’s Economic Advisory Council has said: “In such an event, a decline in business confidence at the general level can combine with a prospective compression of export demand, to cause a significant slowing of the domestic economy.”

The emerging trends have already forced international rating agency Moody’s to lower its growth forecasts for India in 2008 to 8 per cent. This, it says, is largely an outcome of high interest rates impacting consumer demand. The World Bank, too, estimates that India will record a slower growth rate of 8.4 per cent in 2008. Says Chakravarty: “When we were growing at 9.6 per cent, there were concerns about the economy overheating. So, an 8 per cent-plus rate is a good performance. The challenge will lie in ensuring that growth rates don’t slip any further.”

Economists feel that to keep the economy on track, RBI will do well to consider lowering interest rates, while the government could look at direct and indirect tax cuts to stimulate demand.

— Rishi Joshi