New Delhi: India’s economic growth, unscathed by terrorist attacks in Mumbai last month, is slowing as global recession cuts demand for its exports and cools investment.
Vulnerable to slowdowns: The Reserve Bank of India building in New Delhi. Measures to spur the economy began in October when central bank governor D. Subbarao cut the amount of money lenders need to set aside as reserves with it. The repurchase rate is now 6.5%, down from the 9% in July. Ramesh Pathania / Mint
Two of the three hotels and the cafe that were the targets of violence in the nation’s financial capital have reopened for business, and the benchmark stock index has risen 7.6% since the market closed for one day after the assaults began.
While growth is slowing, the decline began before the attacks, which killed 164 people. Exports have been falling amid recessions in the US, Japan and Europe, and the credit crisis has choked off investment. Job cuts have taken a toll on consumer spending, which accounts for 60% of the gross domestic product (GDP).
The recession is the real killer for the economy, not the terrorists, said Sherman Chan, an economist with Moody’s Economy.com in Sydney.
India has become increasingly vulnerable to slowdowns and financial crises in other countries.
Trade represented 35% of the GDP for the year ended 31 March, up from 21% in 1997-98, the year of the Asian financial crisis, according to the central bank. The commerce ministry said exporters slashed 65,500 jobs between August and October, when India’s overseas sales declined for the first time in seven years.
Investment, which accounted for about one third of economic growth last quarter, is also suffering as global credit dries up and overseas investors curb their appetite for emerging-market stocks.
Overseas borrowings and the sale of new shares on the stock market provided Indian industry with about 40% of total funding in the year to 31 March, according to Tehmina Khan, an economist at Capital Economics Ltd in London.
At home, efforts to control inflation by raising interest rates in July to a seven-year high have reduced demand for consumer goods.
Passenger-car sales declined 19% in November, the most in more than five years. Mahindra and Mahindra Ltd, India’s biggest maker of sport-utility vehicles and the local partner of Renault SA, shut most of its factories for three to six days this month because of the slowdown in demand.
Inflation has cooled, after peaking at a 16-year high of 12.91% in August, giving the central bank room to ease monetary policy. Wholesale prices for the week ended 13 December advanced 6.61%, the least in nine months.
Measures to spur the economy began on 6 October when Reserve Bank of India governor Duvvuri Subbarao cut the amount of money lenders need to set aside as reserves with the central bank. On 20 October he presided over the first rate reduction in four years. India’s repurchase rate is now 6.5%, down from the 9% peak set in July.
The yield on the benchmark 10-year bond has fallen 183 basis points to 5.27%, the lowest since June 2004, following the attacks on speculation the central bank will further lower rates.
On 18 November, then finance minister Palaniappan Chidambaram said the government was planning a series of fiscal measures to boost growth; details were announced on 7 December. Under the plan, Prime Minister Manmohan Singh will spend Rs200 billion ($4 billion), or 0.3% of the GDP, on roads, ports and other infrastructure spending. Budget constraints are forcing India to rely more on interest rate cuts to buoy the economy.
Global uncertainty and fundamental economic news on the ground are still grabbing more headlines than terrorism at this point, said Adrian Lim, a fund manager at Aberdeen Asset Management Asia Ltd in Singapore.
Indian companies should prepare for economic growth of 7% in the year ending 31 March, down from 9% or more the previous three years, the government said on 23 December.
That pace is still the second-fastest among the major economies—behind only China.
Nokia Oyj, the biggest maker of mobile phones, LG Electronics Inc., a South Korean television and personal computer manufacturer, and PepsiCo Inc., the world’s second-largest maker of soft drinks, have all said they intend to expand in India. Walldorf, Germany-based SAP AG said after the attacks that its plans are still on track to invest $1 billion by 2010. India is the software maker’s biggest development centre outside Germany.
The benchmark stock index is down 52% for 2008 even after the rebound since the attacks. Overseas investors have purchased $650 million of stocks since 28 November.
We can be hurt but we cannot be knocked down, Ratan Tata, the chairman of Tata group, said at the reopening of his company’s Taj Mahal Palace and Tower on 21 December. Tata’s 139-year-old company controls India’s biggest steel and truck makers, as well as the largest provider of software services.