The crisis in the US mortgages market won’t pare growth in the Indian economy, according to most economists. However, there are signs that despite better than expected agricultural gro-wth, the slowdown in industrial growth would mean that the gross domestic product doesn’t rise at last year’s 9.4%.
“The direct and indirect exposure of the Indian banking sector to the subprime woes is limited, and does not pose a threat to either the local banking system or to the economy,” said Rajeev Malik, economist, JP Morgan Chase.
That view is echoed by Saumitra Chaudhuri, economic adviser to rating agency Icra Ltd and member, Prime Minister’s economic advisory council (EAC). “The EAC does not see any reason yet to revise its annual growth forecast from 9%. For now, I expect the services growth to speed up and industrial growth to decelerate a bit, but agriculture will do well and could compensate for this decline in the second half,” he added.
Goldman Sachs and the International Monetary Fund estimate that a 1% slowdown in US consumption growth resulting from the subprime crisis would reduce gross domestic product (GDP) growth in India by 0.15-0.25%. But overall, the two say that since India is still relatively insulated from the global economy, it may experience a temporary volatility and finally get away with less damage than China, Singapore or Indonesia.
Goldman Sachs expects that in the event of a 1% drop in US consumption growth, China’s growth will decline from 12.3% to 10.9%; Indonesia’s from 5.9% to 5.3%; and India’s from 8% to 7.5%.
“The banking system is currently unusually flush with liquidity. Domestic banks holding excess deposits at the central bank are putting substantial funds with the central bank in reverse-repo operations as well as making sizable subscriptions to market stabilization bonds. All this suggests that the credit channel is likely to be weaker than normal,” said Tushar Poddar, economist with Goldman Sachs.
However, Citigroup India has retained its forecast for India’s economic growth at 9.3%, while rating agency Standard & Poor’s says, “the Asian economies are likely to get a little wet but will not be blown off course.”
The Indian government prepares to release provisional gross domestic product estimates for the first quarter of 2007-08 on Friday.
The real issue facing the Indian economy, according to economists, was a slowdown in industrial growth.
New Delhi-based economy research institute National Council for Applied Economic Research (NCAER) has already scaled down its projection for industrial growth to 9% from 10%. Industry grew at 11.5% in 2006-07. Shashank Bhide, senior research counsellor, NCAER, said, “We, too, expect agriculture to do better this year but it is unlikely to make up (for) the entire reduction in industry growth.”
Rating agency Crisil Ltd, which uses a measure called DRIP (deficient rainfall impact parameter) to refine its forecasts on agriculture, has just raised its estimate for the year to 3.2-3.6%. “Even a good agriculture is unlikely to keep GDP rising at last year’s level and compensate for loss of growth in industrial output,” said its principal economist D.K. Joshi.
According to Bhide, emerging infrastructure bottlenecks, especially with the core sector growing at 5.3% in June, the lowest in a year, could choke industrial growth.
Industry’s capacity expansion plans are already under pressure due to the spike in interest rates. Some believe that the Reserve Bank of India will hit the pause button on interest rate hikes.
“With the investment side of the story largely intact, we expect an extended pause in policy rates to buoy growth in the latter half (of the year),” said Rohini Malkani, an economist with Citigroup India.
However, any abrupt reversal on the external sector could also deny companies access to cheap source of money from abroad.
“Almost 82% of the total $98 billion of capital flows that India has received over the past four years has been in the form of non-FDI flows. As a result, India is more exposed than other emerging countries to a potential sharp reversal in global risk appetite,” said Chetan Ahya, an economist at Morgan Stanley.