By Priya Nigam
East is East, and West is West, and never the twain shall meet. Well, that’s what Rudyard Kipling said. Unfortunately, the “slowdown” monster emanating from the West seems to be digging its fangs into the Indian economy. It wasn’t too long ago when all we seemed to be talking about was the Indian stock market boom and the bright prospects of Asia's third-largest economy. Now, the stock market and the economy are unable to keep pace with expectations. And there is talk of a sharp slowdown in the Indian economy in the coming year.
Moody's Economy.com said India's industrial production (IIP) rose only 5.3% in January. This not only represents a slowdown from the year-ago levels of 11.6%, but also a downturn from December’s 7.7% growth. Moreover, the growth recorded in January 2008 was lower than expected. Compared to December, industrial output was down 1.5%. Following aggressive monetary tightening (nine interest rate hikes since 2004), borrowing costs are now close to the highest they have been in a decade. This has dampened the domestic demand for goods that are sensitive to interest rates. And with inflation on the upswing, the central bank may not loosen its monetary policy in a hurry.
Moreover, the global slowdown has impacted India’s manufacturing production, which forms the lion’s share of the industrial output. With exports suffering, manufacturing production has taken a hit. The US, which is barely managing to keep its head above the water, is one of India’s most important trade partners. With the US economy sliding fast and the rupee having surged against the dollar, things are not really going in favour of exports.
In fact, India’s GDP growth has moderated to 8.4% in the October to December quarter, from 8.9% in the July to September quarter.
Indian investors did not digest the news too well and the Sensex plummeted nearly 5% in afternoon trading on Thursday, led by heavyweights Reliance Industries and ICICI Bank. The broader NSE index plunged 5.4%.
Needless to mention, these developments don’t go in favour of the Congress-led coalition government, with the general elections due next year.
“Softening in industrial production - if it continues at this pace - would pose a serious problem to the Indian growth outlook down the year,” said HSBC economist Robert Prior-Wandesforde. The government forecasts a slowdown in economic growth to 8.8% in the current fiscal year, from 9.6% last year. This would be the first deceleration in three years. Also, GDP growth could slow further next year. Even with these expectations, India would likely remain the world's second fastest growing economy after China.
So, what’s the elixir of life for the Indian economy? Infrastructure, vocational training and sound government policies are areas that definitely need to be addressed. Whatever the recipe for success is, I hope India can whip it up!
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