It is hard to believe that the big debate among economists around this time last year was whether the Indian economy was expanding too quickly for its own good. A lot of heat was generated by the overheating dispute during the summer of 2007. And now, 12 months later, the question is how severe the slowdown will be.
Many private sector economists have started making deep cuts in their forecasts for economic growth in the fiscal year that will start next week. Here are two recent examples. Citibank this week cut its growth estimate for fiscal 2008-09 to 7.7%. It had initially said that the economy would grow at 9% next year, which was later reduced to 8.3%. JPMorgan now says it expects India to grow at 7%, down from the earlier expectation of 7.5%.
There is likely to be more of this in the coming weeks. The International Monetary Fund is scheduled to release its new World Economic Outlook in the first week of April. Here, it will publish its assessment of economic growth around the world this year. And several domestic economists, who haven’t yet officially clipped their growth forecasts, unofficially say that the economy will grow at between 7% and 7.5% in the new fiscal year.
India could be headed for a growth recession—a period of below trend growth. This is quite different from the standard recession when output actually declines in successive quarters. How far below trend will we be flying? The economy grew at an average rate of around 8.9% in the five years since 2003-04. A growth rate of, say, 7.5% in 2008-09 is significantly lower than the five-year average.
India is likely to have company. Harvard economist Kenneth Rogoff says there is a 50-50 chance that China will have at least one year of growth recession (sub-6% growth) in the next two years.
Slower growth will directly affect both companies and the government—companies, because their investment plans have assumed far more rapid growth in demand; the government, because its tax collections depend on how quickly incomes and corporate profits increase.
Overall, however, a growth rate of 7% should not be a cause for tears. It is far higher than the historical growth rate, even in the post-reform period. And countries in the midst of a long boom have had the odd year or two of underperformance. It should be seen—perhaps welcomed —as a pause before a subsequent acceleration.
Will it be a severe slowdown? Write to us at email@example.com