New Delhi: The chief economic adviser to the finance ministry, Arvind Virmani, has offered a bet to the rest of the economist fraternity: The Indian economy will overcome this year’s downturn and bounce back in fiscal 2009-10.
“Everybody, including the International Monetary Fund, is saying that growth will further slide next year. I am saying the opposite, it will move in the opposite direction...That’s an unconditional statement I am making,” Virmani said in an interview.
He expects the economy to expand 8.5% next fiscal, plus or minus half a percentage point. “Anything above 8% is a reversal,” he said. For the current fiscal, Virmani concurs with the Reserve Bank of India (RBI) forecast of 7.5-8% growth.
India’s economic expansion is slowing under the impact of a credit crisis resulting from the global financial turmoil, prompting policymakers to lower their growth forecasts. Tight credit markets and high borrowing costs have caused companies to put investments on hold. The economy, Asia’s third largest, grew 9.1% last year and averaged an annual pace of 8.9% over the last four years.
There won’t be any lack of takers for Virmani’s bet. Economists interviewed by Mint are united in dismissing Virmani’s forecast of faster growth for the next year as “wishful thinking” at best.
“There is a general problem of demand. We (Indian companies) have not been able to raise much money this year, which will further contain their expansion plans. That is how things have worked historically. The possibility of a slowdown is very real,” HDFC Bank chief economist Abheek Barua said.
Economists are pessimistic about growth prospects although RBI cut its policy rates by 50 basis points—for the second time in a fortnight—to 7.5% on Saturday, signalling that concerns about growth outweighed worries about double-digit inflation. The central bank on Saturday also reduced the balance banks must keep in reserve with it. The RBI cut the cash reserve ratio, or CRR, by 1% to 5.5%.
Rosy picture: Arvind Virmani, chief economic adviser, finance ministry. Harikrishna Katragadda / Mint
Still, growth will slide further next year, said Dharmakirti Joshi,principal economist, Credit Rating Information Services of India Limited, citing the effect of the tight policy stance maintained by RBI to combat inflation. Before the 1 November and 20 October rate cuts, the central bank had raised its policy rate by 125 basis points this fiscal year.
“The impact of monetary policy tightening will be felt next year. So growth will be impacted more next year,” he said.
Agrees HDFC Bank’s Barua. “Credit growth has a two quarter lag with GDP growth,” he said. “Credit growth has slowed down and will be considerably worse going forward. Hence it is very very optimistic to believe it (reversal in growth next year).”
Both Goldman Sachs and Citigroup recently have cut their growth forecasts for India for the current as well as the next financial year. While Goldmans Sachs forecasts 7% growth for India in 2009-10, Citigroup pegged the growth rate at 6.6% for the same year.
The Prime Minister’s economic advisory council, or EAC, has forecast 7.7% growth this year.
Institutions such as Goldman and Citigroup say that growth would slow as a result of lower investment even though consumption is expected to hold up given the fiscal stimulus provided by the government through higher public expenditure. India’s growth has been investment-led for the last four years.
However, Virmani says there will not be any reversal in growth of investment and savings. “You look at the 60 years of Indian history and you will never find a complete reversal. You had a huge increase in investment and savings rate. They may fluctuate but it is not going to reverse...That is the experience of the high growth countries of Asia... There is a fundamental change in the Indian economy. That is the source of my confidence,” Virmani said.
The domestic savings rate increased sharply from 28.2% in 2003-04 to 37.4% in 2007-08, while the investment rate increased from 29.8% to 36.2% during the same period. The EAC has projected a dip in the savings rate this year on account of an increasing subsidy burden on public sector companies and erosion in corporate margins. However, it has forecast savings to bounce back in 2009-10.
Analysts believe another source of weakening of growth next year could be poor exports. Recessionary conditions in the US and Europe are also expected to substantially lower demand for Indian goods. At present, merchandise exports contribute 14% of India’s gross domestic product, or GDP.
The International Monetary Fund has forecast that global GDP growth will decline to 3% in the 2009 calendar year and the US economy will grow a meagre 0.1% in the same year.
“I think it is a prolonged slowdown in global economy. I am not confident that next year will be better than this year,” said Ajit Ranade, chief economist of Aditya Birla Group, referring to Virmani’s claim. “It is a bold statement,” he said of Virmani’s economic prognosis.
M. Govinda Rao, director of the National Institute of Public Finance and Policy and a member of the EAC, said even the US economy, the world’s largest, would take at least five years to recover.
“Our export of goods and services depend largely on the US economy. Our growth is dependent on manufacturing and services, not on agriculture,” Rao said. “The impact (on India) will be felt at least for next two to three years.”
Virmani, too, added a rider to his forecast of faster economic growth in the next fiscal, saying the extent of revival will depend on economic reforms. “Though the underlying trend growth rate is 9%, the effects of the current global crisis will last for two years,” he said. “During this period, the crisis will cut our growth rate by one percentage point... But that is still reversible if we carry out reforms in the real sector. Reforms in sectors like oil, sugar, fertilizer, coal are necessary.”