Outlook for India gets worse

Outlook for India gets worse

New Delhi: The World Bank offered a grim forecast for economic growth in India and the world next year even as new data from Japan on Wednesday confirmed that the situation in the world’s second largest economy is rapidly getting worse.

The bank’s Global Economic Prospects 2009 report estimated India’s growth next year at 5.8%, and said the world is on the brink of a rare recession, with global trade expected to fall for the first time since 1982 and capital flows to developing countries predicted to plunge 50%. The bank forecast a growth of just 0.9% in the world economy in 2009.

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“The outlook for the world economy has deteriorated significantly and the global recession will be broader and deeper than previously anticipated," the bank said in a statement.

Meanwhile, the governor of India’s central bank D. Subbarao said the country’s growth projections for the current fiscal ending March may be revised downwards and that 2009-10 may be “a more difficult year", the first admission by a policymaker that the Indian economy’s performance in 2009-10 could be worse than in 2008-09.

Speaking at the Hindustan Times Leadership Summit in November, Prime Minister Manmohan Singh had said India would continue to grow at 8% despite the adverse impact of the global financial crisis.

In October, former finance minister (and now home minister) P. Chidambaram said during an awards ceremony organized by broadcast firm New Delhi Television Ltd that India could end 2008-09 with a growth rate of 8% and that he was “confident that in 2009-10, the growth rate will bounce back to 9%".

The World Bank’s economists do not share that optimism.

“High food and fuel prices, tighter credit conditions, and weaker foreign demand have led to worsening external accounts and slower investment growth. The downturn is most apparent in India and Pakistan, where industrial production fell sharply," the bank’s report said.

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“We see that the global economy is transitioning from a long period of strong growth led by developing countries to one of great uncertainty as the ongoing financial crisis has shaken markets worldwide," said Hans Timmer, manager, global trends, in the World Bank’s development prospects group in a statement.

“The slowdown in developing countries is very significant because the credit squeeze directly hits investments, which were a key pillar supporting the strong performance of the developing world during the past five years."

The bank expects India to grow by 6.3% in 2008. The government has said India will grow by between 7% and 8% in 2008-09.

Split verdict

Economists here are divided on the pace of India’s growth in 2009.

Suresh Tendulkar, chairman of the Prime Minister’s economic advisory council, said that while the economy would slow next year, it wouldn’t slow to the extent indicated by the World Bank’s estimate.

“What will be the growth rate next year will largely depend on how the economy performs in the second half of the current fiscal." In the first half of this financial year (April-September), India’s economy expanded by 7.8%.

Yes Bank Ltd’s chief economist, Shubhada Rao, however, agreed with the bank’s view. “This fiscal we are looking at 6.7% (growth), and next year around 6%. The decline in growth will be due to a fairly rapid industrial slump. This will contain future investments which will have a lagged impact on consumption."

Will the stimulus work?

Late last week, India joined the ranks of countries that have provided a fiscal stimulus to the economy by announcing its own, worth around Rs32,000 crore.

The move came in the wake of another effort by the Reserve Bank of India (RBI) to make easier credit available for companies and individuals by reducing its policy rate.

“The fiscal stimulus should be looked at as a psychological stimulus which it is meant for. But the response has to come from the banks and the industry," said Tendulkar.

Still, that may not be enough said Yes Bank’s Rao and Credit Analysis and Research Ltd, or CARE Ratings’ Soumendra K. Dash.

Rao wants RBI to ease the monetary situation some more and announcesector-specific measures to prevent a slowdown in growth, while Dash recommends that state governments increase their public expenditure.

“The Central government should allow more liberty to state governments for higher public expenditure in infrastructure projects. State governments are apprehensive about going for higher borrowings in fear of being penalized. The Central government should give green signal to state governments to go for higher public debt."

A better 2010

The World Bank expects a quick revival in the economic prospects of the world and India. It expects India’s economic growth to bounce back to 7.7% in 2010.

Economists here add that the current downturn will end in less than a year.

“There will be a revival in economic growth from September 2009 and the economy will bounce back in second half of 2010," said Rao who, however, warned of “economic pain" in “the next nine months."

Dash added that the current economic slowdown will come to an end by the first half of 2010.

“The investment rate has been consistently increasing since 2002-03 and stood at 35.9% in the first half of 2008-09. This indicates the high rate of asset formation making the current recessionary cycle of shorter duration."

AFP, NYT and Reuters contributed to this story.

Graphics by Sandeep Bhatnagar / Mint