Will the fiscal and monetary boosts and the resilience of rural demand buoy the Indian economy this year?
Barclays Capital economist Sailesh K. Jha doesn’t think so. He has revised his India GDP (gross domestic product) forecast for fiscal 2010 from 5.2% to 4%.
That’s not all—he writes that the downside risk to his forecast could be as large as 200 basis points.
Why the downward revision? The Barclays Capital report cites two factors: 1) the global nature of the current slowdown and 2) the prevalence of tight credit conditions despite substantial monetary easing.
Jha points out: “Backward and forward linkages between developed and developing states have grown stronger since fiscal 2002-03, which means that headline GDP growth will be much more vulnerable in the current downturn.”
The lowest annual growth rate in GDP since liberalization has been 4.3% in 1997-98, during the Asian crisis. Jha argues we’re likely to breach that low this time.
Won’t the resilient rural sector be a buffer? Not really, because “some studies have highlighted that the share of industrial and service sector activities in rural area GDP has risen to 58.4% in fiscal 2008-09 from 48.6% in fiscal 1999-2000. In addition, studies have indicated that consumer spending in urban areas has a significant impact on rural employment and incomes; in particular, consumer spending on food, housing, health, education, clothing and footwear and consumer durables.”
The lack of credit growth in spite of higher money supply growth implies that financing constraints will continue to hobble GDP growth.
Won’t the fiscal stimulus help? It will, but that the stimulus acts with a lag of one year. Jha believes the stimulus to growth will be around 100-200 basis points and it will kick in not before early 2010.
What about monetary policy? Although Barclays Capital expects Reserve Bank of India (RBI) to cut rates further so that the reverse repo rate is 1.5-2% by the third quarter of the current year, the note says that “the impact of M3 (the amount of money in the system) growth on GDP growth is small, has significant lags (three-four quarters), and is typically short-lived. As a result, in addition to policy rate cuts, RBI may allow the REER (real effective exchange rate) to depreciate further in order to limit downside risks to growth” and this could lead the rupee to fall to Rs56 to the dollar within the next three months.
The Barclays forecast is way below the consensus forecast of 5.8% growth for fiscal 2010 and doesn’t seem to take into account the beneficial impact on consumption of lower commodity prices or the resilience of agricultural output.
Nor does it seem to consider the much higher savings rate in the economy compared with the 1990s. But it breaks new ground in pointing out that the current downturn is likely to be worse than the ones in the 1990s and in the fact that the lower dependence of rural India on agriculture could actually be a weakness during a downturn.
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