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India’s growth may drop to 4.3% in 2009: OECD

India’s growth may drop to 4.3% in 2009: OECD
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First Published: Wed, Apr 01 2009. 01 23 AM IST

Updated: Wed, Apr 01 2009. 01 23 AM IST
New Delhi: India’s economic growth may slow to an 18-year low of 4.3% in 2009, with falling exports offsetting expansion in domestic demand, the Organization for Economic Co-operation and Development (OECD) said on Tuesday.
Also See Economic Outlook (Graphic)
Though the country’s gross domestic product (GDP) grew at a meagre 1.3% in 1991-92, the only growth rate comparable with the current projection was in 2000-01 at 4.4%.
OECD economist Sean M. Dougherty told Mint that “this is due to a fairly broad-based slowdown in global economy and less to do with the Indian economy,” adding that India’s external sector will bear the brunt of the slowdown.
While the interim report of OECD economic outlook is so far the weakest growth projection for India in 2009 calendar year, another growth outlook starting April, also released on Tuesday by the Asian Development Bank (ADB), forecasts the country’s economic growth to dip to 5% due to worsening consumer and business sentiments.
“Consumers as well as entrepreneurs will probably be reluctant to borrow either to spend or to invest. Banks will maintain a risk-averse strategy, especially given a likely deterioration in the quality of loans. As consumer sentiment drops and job losses mount, an immediate revival in demand is unlikely,” ADB said in its report.
“India’s long economic upswing has now ended...with GDP growth well below potential by late 2008,” OECD said.
While the government has estimated the economy to grow at 7.1% in fiscal 2009 that ended on Tuesday, growth may moderate to around 6.5% during the fiscal year, according to Planning Commission deputy chairman Montek Singh Ahluwalia. The Indian economy grew at 6.9% in the first nine months of the financial year.
However, both ADB and OECD have said that India’s economic growth would bounce back in 2010 with a projected gradual recovery in global economy in the second half of 2010. While ADB expects India’s growth to pick up to 6.5% in 2010, OECD has projected it to be 5.8%.
“In 2010 (fiscal year), a combination of a recovery in the G3 (US, Japan and the European Union) economies, improved perception of lower risks of investing in India, and lower domestic lending rates is expected to facilitate some recovery in private investment and manufacturing growth,” ADB said.
Bruno Carrasco, a director at ADB’s South Asia department, told reporters that India has undertaken timely and decisive economic stimulus plans, and this will arrest the decline in GDP growth. However, he cautioned that at present there is “limited or no fiscal space for more stimulus”.
Carrasco added that any short-term revival in economic growth has to be borne by the central bank through easing of monetary policy. The Reserve Bank of India has cut interest rates since the slowdown in activity became evident. From a peak of 9% in September, rates had been lowered to 5% by early March. The next monetary policy review by the central bank is due on 21 April.
ADB also emphasized the need for getting back to the fiscal consolidation path soon after an economic rebound as it considers “excessively large fiscal deficits” as downside risks that may jeopardize growth prospects—with domestic borrowing requirements of the government putting pressure on interest rates and thus restricting the availability of private credit and investment.
India’s fiscal deficit ballooned to 6% of GDP in 2008-09 and the public sector deficit has exceeded 10% of the GDP. Public debt is estimated to be 80.7% of GDP for the year ended 31 March, indicating little room for fiscal manoeuvring.
Last week, the government said it plans to sell Rs2.41 trillion of bonds in the first half of 2009-10.
ADB called for better targeting of food and fertilizer subsidies and improved cost recovery by oil marketers and refineries to sustain fiscal deficit. “At a time of falling business confidence, expansionary fiscal policies could impair the confidence of investors unless clear signals are given that the present large deficits are truly temporary,” it said.
Carrasco dismissed any fear of deflation in India, even as wholesale price inflation is expected to slip into the negative territory. “We define deflation as sustained decline in prices as measured by the Consumer Price Index (CPI). We do not see too much risk of CPI going into negative territory,” he said.
The annual inflation rate stood at 0.27% for the week ended 14 March. While the International Monetary Fund has forecast inflation based on wholesale prices to average 1.9% in fiscal 2009, OECD and ADB projected it to be 4.5% and 3.5%, respectively, during the same period.
Graphics by Sandeep Bhatnagar / Mint
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First Published: Wed, Apr 01 2009. 01 23 AM IST