Monday, June 15, 2009

India will not see high economic growth in the next fiscal year

Indian economy has been observing rapid growth for the past six or seven years. In the post four years, the country observed an unprecedented average growth rate of 8.6%, but not anymore. On March 27, 2009, Montek Singh Ahluwalia, Deputy Chairman, Planning Commission, said that Indian economy would grow less than 7% missing the government growth target of 7.1% in fiscal year 2008-09. Mr. Ahluwalia was attending the national conference and annual session of the Confederation of Indian Industry (CII) at the Taj Palace Hotel in New Delhi. The conference started from March 26, 2009. He said that the world economy was facing the worst crisis in the last sixty years and it would not go away in the next two years. Through the conference, Mr. Ahluwalia urged all the top businessmen of the country to remain patient. Here are some of the highlights of the CII conference:

The $1.2 trillion Indian economy, the third largest economy in Asia, is going through a tough time. According to latest estimates, Indian economy would grow only 6.5% in the current fiscal year ending on March 31. This lower level of growth has been caused by a decline in the supply of foreign funds. However, the country would be able to maintain its current growth rate in the upcoming fiscal year. IMF estimated India’s growth to be 6.3% in the current fiscal year and would decline 5.3% in the next fiscal year. Mr. Ahluwalia said that rural economy has been insulated from the global slump.

Indian government has not decreased its spending and introduced tax cuts which would increase the country’s fiscal deficit. According to Arvind Virmani, Economist, Finance Ministry, the higher spending will help India’s growth and government borrowing will not create any problem for private investment. Financial reforms are also necessary.

The latest assessment by the Indian government revealed that the year 2009 will be worse than 2008 due to the growing fiscal deficit. In the previous budget session, government estimated the fiscal deficit to be 2.5% of the GDP which was revised to 6% in the latest interim budget session that took place last month. According to Ahluwalia, the fiscal deficit would be more than 6%.

Economic stimulus is going to further increase the fiscal deficit, yet, the government must continue its stimulus measures. In September, India first felt the tremor of the economic downturn as the country’s credit market froze. Since then, the current government injected about $85 billion into the economy.

The new government that will come to power in May must spend 1% of the GDP as “extra stimulus” to maintain the current economic growth. The effect of the stimulus package declared by the government will be seen in the first quarter of the next fiscal year. The IMF urged all the countries of the world to spend at least 2% of their GDP on stimulus. Countries like Saudi Arabia, Australia, China, Spain and US will spend that much amount as stimulus.

Currently, India is observing its lowest inflation rate in the last thirty years. The downward movement of the inflation which was caused by high base effect continued till the middle of March but high cost of manufactured products like cement and metals stalled the pace of decline. Last week, the inflation rate was 8% and from there it came down to 0.27%. Now, it is very close to zero and many economists are predicting that the rate would turn negative and cause deflation. Deflation happens when prices of goods decline due to lower demand. This encourages consumers to lower their spending which affects the economic growth. Serious deflation might hike the unemployment rate. Both Mr. Ahluwalia and Arvind Virmani ruled out the risk of deflation. Arvind Virmani, top economist of the finance ministry believes that India’s inflation would not go below “zero” in the next fiscal year. He thinks that the wholesale price index on average would be “zero, plus or minus 2 percent.”

According to Mr. Ahluwalia, an existing gap between inflation rates based on the official wholesale price index and different retail price indices is depriving consumers of the benefits of lower inflation.

On the first day of the conference, Duvvuri Subbarao, Governor, The Reserve Bank of India, said that his bank is in touch with other private banks in the country and asked them to lower their interest rates. Since October 2008, RBI lowered its lending rate by 400 basis points. From the same month, RBI slashed the percentage of deposits banks are required to keep as cash and its borrowing rate by 2.5 percentage points to 3.50%.

On February 16, 2009, Pranab Mukherjee, acting finance minister, said that Indian government will have to borrow $71 billion in the next fiscal year. Current debt of the government is equivalent of 80% of the country’s GDP.

Related articles:

News On All India Radio

Hindustan Times

The Economic Times

Indian Express


(This entry was originally published in March 2009 and is written on the context of that time.)

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