For the first time in three years, India’s economic growth rate is poised to dip, albeit modestly, sending economists looking for terms such as moderation and soft landing.
The government said the gross domestic product (GDP) is projected to grow at 8.7% in 2007-08 even as investment continues to accelerate, ensuring that the growth momentum would be sustained, despite a decline in consumption levels in the economy.
The slowdown, say analysts, has been prompted by the credit curbs imposed by the Reserve Bank of India (RBI) as well as the setback to exports due to the 12% appreciation of the rupee against the dollars.
The advance estimates, released by the Central Statistical Organization, or CSO, has pegged the country’s national income, measured in constant prices, at Rs31.14 trillion. Measured in terms of current prices, the GDP aggregates Rs42.62 trillion—which given that the average exchange rate in the year is around Rs40 per dollar implies that India has been officially dubbed a $1 trillion economy.
The advance estimate of the GDP is lower than the 8.9% projected by the Prime Minister’s Economic Advisory Council (EAC), three weeks ago, but higher than the 8.5% forecast by RBI.
Economists broadly agree that the lower growth is in line with expectations as growth in manufacturing industries, especially consumer goods, as well as construction has been slowing since the beginning of the year due to lower demand. As a result, private final consumption expenditure at constant prices is now marginally lower at 57.6% of GDP, compared with 58.6% in 2006-07.
“It’s essentially a turning point,” said Abheek Barua, chief economist, HDFC Bank Ltd, “though the economy is clearly in for a soft landing, not a sharp slowdown. Next year should be hard, 8.5% or less. These things normally tend to linger for a while.”
Reeling under six-year-high interest rates, manufacturing is expected to grow at 9.4% compared with 12% last fiscal year, while construction could see a big drop from 12% to 9.6%. Even the services sector related to credit and construction has been affected, with growth of the financing, insurance, real estate and business services slowing to 11.7% from close to 14% last fiscal year.
Says Dharmakirti Joshi, principal economist, Crisil Ltd: “I wouldn’t term this a slowdown, but an RBI-engineered growth moderation. While consumption growth has slowed down, investment growth has moved up in real terms.”
The share of gross fixed capital formation at constant prices, an indicator of investment in the country, has moved up to 32.6% from 30.6% last fiscal.
Barua also expressed surprise that even agriculture is expected to grow much slower, by 2.6% compared with 3.8% last fiscal year, even though the EAC review has revised its outlook for the sector to 3.6%.
Part of the reason could be, as Chetan Ahya, director, Morgan Stanley Asia, explained, “the government is concerned about the yield on winter (rabi) output. As of 1 February, the area under coverage for wheat for rabi (winter) crops has declined by 1.8% over last year.” However, according to Saumitra Chaudhuri, member of the EAC, “the CSO has to wait for the estimates from the agriculture ministry, which are usually conservative in the beginning. The figures get clearer after the agriculture year ends in June.”
According to him, the agriculture growth estimates are likely to be revised upwards later and the final GDP growth figures will end up just short of 9%. Still, the outlook for the next year remains relatively modest. “The push for high growth through monetary action is neither desirable nor feasible,” says Barua. With the US economy into a slowdown, corporates are looking at a relatively gloomy external demand scenario.
And, says Joshi, although so far “RBI has managed to stay ahead of the curve by balancing growth and inflation objectives, it would be difficult to maintain this balance with the existing policies.”
The sectors that expanded at a higher rate than the previous year were those comprising trade, hotels and transport; electricity, gas and water supply as well as community, social and personal services.