The Indian Slowdown

The Indian economy is plummeting with weakening export markets, higher inflation and shortage of talented workforce. Besides, the industrial growth has fallen to a disappointing low as wholesale prices inch higher. The double-digit inflation has been causing sleepless nights to the Finance Ministry. Standard and Poor’s, the global Rating agency, confirmed the economic downfall and warned that it might lower India’s sovereign rating of BBB-(investment grade status) due to the country’s deteriorating credit profile over the last 12 months. According to the Economist Intelligence Unit, economic growth will slow down to 7.7% in the current fiscal from 9%in the previous year and growth will be primarily driven by domestic consumption and demand.
The devil called Inflation
Asian countries are facing the inflation spiral, which was brought on by multiple upward pressures on prices compounded by supply constraints. The skyrocketing food and fuel prices are strong factors behind this surge in the rate of inflation; structural factors are also being at work. A report from Asian development Bank (ADB) suggests that behind the economic slowdown of the Asian region, infrastructure bottlenecks and skill shortages that are forcing up wages and prices are also playing a major part. At the same time , in some countries , money supply is expanding because of burgeoning current account surpluses and the accumulation of foreign reserves.
Inflation pressure is not limiting to Asia alone, it has become a global phenomenon. ADB urges policymakers to tackle inflation at its roots. For some economies it could mean a more flexible exchange rate. In others, fiscal spending and priorities could be scrutinized or measures taken to ease supply bottlenecks that are adding to cost pressures.
India’s steps
In the recent past RBI has raised interest rates repeatedly to restraint inflation and tightened bank’s reserve requirements. Interest rates at a six-year high impacted industrial production and restrained consumption demand. A slowdown in the industrial sector is serious as a healthy industrial sector is needed for better employment. Meanwhile, high interest rates have led to a stronger currency, making the country’s exports more expensive in the world markets. Export growth deceleration is very significant in rupee terms; 5.34% in the first half of this fiscal. Thus, going forward, further slowdown impacts the country’s GDP badly.
There is a great concern that the credit market crisis may make it tougher for the FIIs to invest in India. A slowdown in FDI investment on account of tightening global liquidity and higher domestic rate of interest are affecting the current investment boom. Also, the restrictions on easy accessibility of foreign funds and political uncertainty arising from the forthcoming elections are not conducive for investment demand. Besides, fears of global slowdown are bound to have an adverse impact on India.
Further….
China’s economic growth is driven by exports, while India’s growth is driven mostly by domestic demand. The government is still hopeful that the strong fundamentals of the economy would continue to attract significant investments in equity market from abroad. Attention could be paid to improve the infrastructure and make public sector –driven fundamental issues such as education and human resources more effective to sustain high growth. India’s infrastructure has so far been predominantly public-financed. The need of the hour is greater incentives towards public and private partnerships for infrastructure projects.
US recession implications
The recent World Bank report reveals that the economies of developing countries will not be directly affected over the next two years by either the US subprime mortgage crisis or a US economic recession. Developing countries would feel the impact , but it would be overshadowed by the domestic dynamism that we are seeing in countries such as India, China and other Asian countries. Like in India, technology is responsible for the strong economic performance. On the whole , a slowdown in the developed economies may not have a major impact on the domestic economy. On, the flip side, the pressure on prices of oil, food and other raw materials is likely to continue making inflation management a challenging task this current fiscal.
The way Ahead
India expanded at an average of 8.6% over the past 4 years. It is much less dependant on the external markets than the Chinese economy. While some export demand compression is likely to put an additional burden on the exports of goods and services , it is unlikely to be significant as to depress growth. Despite a surge of value in the rupee against the dollar, higher interest rates and record global crude oil prices, policy makers are confident of maintaining growth momentum. On the other hand, the economy is slowing down faster than what was expected 2 months ago. For the current fiscal, even achieving a 7% growth would be a challenge. It is going to be tightrope walk for the finance ministry to sustain the pace of growth while controlling inflation.