Will India Escape the Global Slowdown?

By Priya Nigam

As a child, I was quite fascinated by the supposed habit of ostriches burying their heads in the sand, believing they were protected from any danger. (To my great disappointment, I later learnt that this was a myth!) Anyhow, it seems like I have been somewhat of an ostrich myself lately. Talks of the US slowdown turned to recessionary fears and I thought this would not really impact India’s growth momentum. Speculations of a global slowdown were also not enough to dampen my bullishness about India’s prospects. But, Mr. P Chidambaram’s latest comments shook me out of my euphoria.

India’s Finance Minister said during a speech at the Lee Kuan Yew School of Public Policy in Singapore on Wednesday that the nation’s ability to sustain record growth may be affected by a slowdown in the global economy. India’s exports have been under pressure for some time now, with the US being one of the most important markets and the greenback having plummeted against the rupee. Exports are not the only area that is affected. Given the clear signs of a slowdown in the world economy, global investors are being dissuaded from making investments in developing countries, Mr. Chidambaram explained. Global investors are adopting a “wait and watch” policy, deferring their plans to invest in India.

At a little over $900 billion, India is Asia's third-largest economy. The country has been able to sustain high GDP growth over the past five years. The Finance Minister said India’s economic growth is likely to be close to 9% in the fiscal year ending March 31, 2008. “Global slowdown, rising inflation and subdued interest in investment make for a combination that can have only negative consequences for developing countries,” the Finance Minister said.

Meanwhile, Citigroup has cut its forecast for India's 2008 economic growth to 7.7%, from its earlier projection of 8.3%. Citing the “recent rapid deterioration in economic and financial conditions” in the US, Citigroup trimmed Asia's economic growth outlook for the year from 8.2% to 7.6%. JPMorgan has cut its forecast for India's economic growth in the fiscal year starting April 1 to 7%, from its earlier projection of 7.5%. This would mark India’s slowest growth rate in six years.

Any slowdown in economic growth would have a direct impact on the already-troubled stock markets. India is facing high food prices, rising commodity prices and soaring oil prices. Against this backdrop, there is unlikely to be any rate cut announcement. Moreover, India's industrial production figures were unsupportive. The stock market should definitely see significant volatility in the upcoming weeks.

Suggested reading:

• India ahead of China in Bertelsmann survey

• Don’t panic when the stakes are down