The Hindu Business Line : Economy: Has the dream run its course?

GDP growth, which touched an 18-year high of 9.4 per cent in May 2007, is showing signs of a slowdown. The rising rupee, surge in global oil prices and an imminent slowdown in the US economy may cloud the Indian economy’s prospects in the near term, says S. D. NAIK

After achieving an average real GDP growth of 8.6 per cent per annum during the four-year period 2003-04 to 2006-07, the Indian economy is now showing clear signs of a slowdown. The GDP growth during the second quarter ending September 2007 has moderated to 8.9 per cent despite the fact that the agricultural sector has shown an improved performance with a growth of 3.6 per cent compared with 2.9 per cent in the same quarter last year.

When the Central Statistical Organisation (CSO) released its revised estimate of GDP for 2007-08 on May 31 at 9.4 per cent, the highest in 18 years, the Finance Minister, Mr P. Chidambaram had told the media: “The time has come to shed the lingering doubts about the sustainability of high growth and scepticism about the shift to a higher growth trajectory.” On an earlier occasion, he had expressed optimism that the economy could grow at 10 per cent during the current fiscal.

DOUBTS RESURFACE

However, the sentiment turned bearish within the next four-five months and doubts about the sustainability of the economy’s dream run have resurfaced. Following the rapid appreciation of the rupee against the US dollar, there has been a distinct slowdown in exports in rupee terms and a downturn in industrial production.

Moreover, the view is gaining ground that the outlook for the economy is bound to be further affected by the unprecedented surge in international crude oil prices, and the unmistakable signs of a global slowdown. Expectation of a slowdown in the economy owing to the rising exchange value of the rupee, high interest rates, surging global oil prices and a fallout of the US sub-prime crisis has already dented the business confidence in the country, which has touched a five-year low.

The latest business confidence survey of the Indian industry released by the FICCI recently shows that apart from export-oriented industries, companies supplying raw material and intermediate goods to export-driven sectors are also facing the brunt.

Similarly, according to the Assocham Business Barometer (ABB) survey of CEOs conducted between October 29 and November 5, the price of crude oil nearing $100 per barrel is perceived to be the biggest risk to the growing Indian economy followed by unabated rise in rupee value and signs of a global slowdown.

Though the Government is still hopeful of achieving a GDP growth of 9 per cent this fiscal, the actual growth could well be lower than the RBI’s more conservative estimate of 8.5 per cent. It may turn out to be just around 8 per cent or so in line with the one projected by the IMF in its World Economic Outlook at 7.8 per cent.

SIGNS OF SLOWDOWN

There are already signs of an impending slowdown in the growth momentum of the economy. For instance, export growth has already decelerated. While this deceleration is not very significant in dollar terms, in rupee terms, it is substantial at 5.34 per cent during the first half of this fiscal. This has hit hard the employment intensive sectors such as textiles, leather, handicrafts and gem and jewellery.

Though export growth during October has bounced back to 35.6 per cent in dollar terms and 17.9 per cent in rupee terms, it is largely attributed to the execution of past orders. Moreover, there has been a big rise in the shipments of petroleum products, gems and jewellery and engineering goods that rely heavily on imports. However, textile exports fell by 22 per cent, handicrafts by 66 per cent and leather by nine per cent during the month.

According to estimates, the country has already lost some two million jobs on account of exports becoming unprofitable and the country may end up losing eight million jobs by March 2008. It is now felt that exports during the current fiscal may at best touch $140 billion against the target of $160 billion.

As expected, the export slowdown has had an adverse impact on industrial production. The industrial growth rate measured in terms of index of industrial production (IIP) has decelerated to 9.2 per cent during the first half of current fiscal (April to September) from 11.1 per cent in the previous period. For September this year, the IIP has declined sharply to 6.4 per cent from 12 per cent in September 2006. The industrial slowdown is largely driven by the manufacturing segment.

DOMESTIC DEMAND

There are also indications of a slowdown in domestic demand largely because of the hardening of interest rates on loans. This is reflected in the lower growth of 5.3 per cent registered by the consumer goods segment during the first half of the current fiscal against 11.5 per cent in the previous period. Over the same period, the consumer durables segment has recorded an absolute decline of 3.2 per cent from a robust growth of 15.2 per cent in the previous corresponding period.

Since India’s growth in the recent period has been mainly driven by domestic consumption (contributing, on an average, to about two-thirds of the overall demand), any slowdown in the domestic consumption demand is bound to affect the growth momentum, notwithstanding the significant rise in the rates of savings and capital formation in the recent past.

The other indicators of a slowdown in domestic demand are the lower off-take of non-food bank credit and a deceleration in the earnings growth of the corporate sector. For the quarter ending September 2007, the results of 2,000 companies showed a decline in revenues as well as profits. They recorded a 23 per cent growth in earnings and 12 per cent growth in revenues during the quarter as compared with 47 per cent growth in profits and 32 per cent growth in revenues during the quarter ended September 2006.

According to a study by Centre for Monitoring Indian Economy (CMIE), India Inc is expected to witness a further slowdown during the third quarter of 2007-08 with lower sales growth and earnings.

MEDIUM-TERM OUTLOOK

As for the medium term, the Eleventh Five-Year Plan cleared by the Union Cabinet recently has raised the expected GDP growth rate to nine per cent per annum, up from 7.6 per cent achieved during the Tenth Plan. However, going by the available indicators, the task is not going to be easy given the emerging constraints and risk factors. As the report released by the World Economic Forum’s Global Risk Network and the Confederation of Indian Industry (CII) points out, the existing infrastructure in India is stretched to its upper limits and huge investments would be required to sustain the growth momentum.

Given the virtually stalled reform process, attracting the required investments in infrastructure is going to be quite difficult. There is an urgent need to accelerate the pace of financial sector reforms, cut down the burgeoning subsidy bill which has now touched Rs 1,00,000 crore and ensure better fiscal discipline.

The medium-term outlook for the economy has also been clouded by the change in the global economic environment. The IMF has now lowered the global growth forecast for 2007 to 4.8 per cent from 5.5 per cent in 2006. More worrisome, however, is the impending slowdown of the US economy, which is bound to have some adverse impact on India growth story.