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Decelerating services may hit economic growth

Decelerating services may hit economic growth
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First Published: Fri, Feb 29 2008. 12 10 AM IST

Updated: Fri, Feb 29 2008. 12 10 AM IST
New Delhi: While national income continues to be dominated by a strong services sector still expanding in double digits, deceleration in the sector’s growth could portend a possible decline in demand for industrial products leading, in turn, to a lower than anticipated economic growth, analysts say.
Financial housing and real estate services are expected to grow to 11.7% in fiscal 2008, 2 percentage points lower than last year, while community services, mainly comprising government and administrative services, is projected at 7%, one basis point higher that 2006-07.
“The growth of financial services comprising banking, insurance and business services, after declining to 5.6% in 2003-04 bounced back to 8.7% in 2004-05, 11.4% in 2005-06 and 13.9% in 2006-07,” said the Economic Survey and projected that transport, communication, trade and hotel will grow marginally to 12.1%.
Growth was led by “impressive progress in the telecommunication sector and higher growth in rail, road and port traffic,” the survey added. The sector grew at an average of 15.3% over the 10th Plan.
One expert said the true picture could be worse, because the Economic Survey’s projection for 2007-08 was based on advance estimates for the last quarter.
“I expect greater deceleration in the fourth quarter, so the final GDP (gross domestic product) growth figure is likely to be lower than 8.7%,” said N.R. Bhanumurthy, an associate professor at New Delhi-based Institute of Economic Growth.
The Indian GDP expanded at 9.6% in fiscal 2007.
“See, some of the services sectors such as trade, insurance and finance are dependent on the US economy and the deceleration in these numbers reflect what is happening there,” Bhanumurthy added.
The US is in the middle of what some economists call a slowdown, following last year’s crisis in the housing loan market in the world’s largest economy.
With domestic demand being the key driver in the Indian economy, the decline in the services sector is already showing its effects, such as a contraction in demand posted by the consumer durables industry, he added.
Rajeev Malik, an executive director at JPMorgan Chase said, “The moderation in economic growth this year can be ascribed to slower pace in both industry and services, owing to moderate top line growth for companies because of slowing external and domestic demand in India as well as China.”
SLOWDOWN?
A tepid expansion of the services sector could result in lower demand for industrial products. Evidence: declining output of the consumer durables industry.
OUTLOOK
Growth in financial, housing, realty services is projected at 11.7% this year, 2 percentage points lower than in fiscal 2007. GDP growth has been set at 8.7% in fiscal FY08, lower than the 9.6% in the previous year.
rahul.c@livemint.com
Paromita Shastri contributed to this story.
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First Published: Fri, Feb 29 2008. 12 10 AM IST