The Hindu Business Line : India’s GDP to grow by 4.3% in 2009, says OECD

New Delhi, March 31 India’s ‘long economic upswing’ has now ended and its real gross domestic product (GDP) growth, running below potential by late 2008, is projected to be 4.3 per cent in 2009.

Outlook

Presenting an interim economic outlook for industrial world and to emerging economies such as Brazil, China, India and the Russian Federation on Tuesday, the Paris-based club of 30 rich countries, the Organisation for Economic Cooperation and Development (OECD) said “the extent of the deterioration in the fiscal position prior to the slowdown” in India meant that “there is little scope for discretionary fiscal policy action.

“Rather, it said, the stress should be on “a further monetary easing, as there is still room to lower interest rates”.

The inter-governmental think-tank of industrial world said this year, falling exports are projected to offset continued expansion in domestic demand and with the gradual recovery of the global economy, India’s growth will pick up to 5.8 per cent in 2010.

Stating that inflation has moderated markedly at the wholesale price level to under one per cent by March with much of this decline arising out of lower commodity prices that carry a high weight in this index, OECD said India’s consumer price inflation has yet to moderate.

India’s unbudgeted expenditure led to a marked spurt in the fiscal deficit last year and as a result, the Central Government budget deficit ballooned to six per cent of GDP with the total public sector deficit exceeding 10 per cent of the GDP, owing largely to public sector pay rises and the decision to order banks to write off the overdue debts of small farmers.

unbudgeted expenditure

Given this deterioration in public finances, India has unveiled only “limited fiscal measures to offset falling external demand” and the cost of all measures, including the one announced after a week of the interim budget such as cut in central value-added tax, service tax cut and subsidies for export credits constituted 1.1 per cent of the GDP.

While taking note of the Government’s hike in tariffs on steel and some other products and a temporary ban on Chinese toys imports and launch of a number of anti-dumping probes against Chinese imports, OECD called for avoidance of protectionist measures.

On India’s monetary easing by the central bank with the interest rate falling from a peak of nine per cent last September to five per cent by early March, it said, down the line, banks have not reduced their prime lending rate by as much as the fall in official rate.

It said Indian rupee’s exchange rate has depreciated by 20 per cent against the US dollar in the year to March and 11 per cent in effective terms. OECD said the impact of easier monetary conditions and the marked increase in the fiscal deficit should be sufficient to counteract the impact of lower exports on employment and, hence, household income and spending.

domestic consumption

With domestic consumption remaining fairly buoyant, adequate bank finance and the impact of the weaker exchange rate beginning to show on exports, business investment is also projected to remain relatively robust in India, it said.

“Once world trade stabilises, the economy should recover momentum, although India’s growth is set to remain sub-par in 2010”, OECD contends. Taking a broader canvas, the global economy will shrink by 2.75 per cent and world trade flows will fall by 13.2 per cent this year, it said adding that “the world economy is in the midst of its deeper and most synchronised recession caused by a global financial crisis and deepened by a collapse in world trade”. But, the world economy is set to rebound in 2010 growing by 1.2 per cent.

Job losses

The report also warned that the number of jobless workers in the Group of Seven — Britain, Canada, France, Germany, Italy, Japan and the US — was likely to double from its mid-2007 level to reach 36 million in late 2010.

Pointing out that additional macroeconomic stimulus is also critical to cushion the fall in aggregate demand in industrial world, OECD said an essential step to arrest the “economic haemorrhaging” that is under way is to devise and implement a coherent strategy that squarely tackles the mess in the global financial markets.

Dealing decisively with impaired bank assets in rich world and broader concerns about bank solvency is needed to restore credit supply and trust and confidence in financial markets, OECD said.

“Doing so calls for action to create transparency about losses and impaired assets, to separate institutions that are viable from those that are not and where necessary to re-capitalise or as a lost resort nationalise, insolvent financial institutions”, it said.

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