The Indian recent economic growth momentum

Published February 14th, 2008 - 09:08 GMT

Global Investment House – Kuwait – India Economic &Strategic Outlook –  Despite several challenges, Indian economy continued to be resilient enough to grow at a robust rate. Several factors such as high inflation, moderation in global growth rate, rising crude oil prices, appreciation of Indian currency against US dollar, relatively higher interest rate scenario, etc. poses tremendous challenges to the Indian economy, however, it continued its growth momentum. The resilience of Indian economy against global concerns reflects that Indian economy is more of domestic driven unlike other emerging economies in the world. As per the latest figures, real GDP growth of India accelerated to 9.6% in 2006-07 from 9.4% in 2005-06, boosted by the strong growth in the services, industrial and to some extent agriculture sectors. This growth trajectory continued even in the first half of 2007-08 as real GDP grew by 9.1% compared to 9.9% H1FY07. The acceleration in growth during 2006-07 and first half of 2007-08 was largely driven by the robust growth registered by services and industrial sector, which recorded a double digit growth in 2006-07.

The GDP growth rate of 9.6% is one of the highest in the world. This indicates that the Indian economy has acquired considerable strength and buoyancy and it has the ability to overcome obstacles to growth as they manifest themselves. There is good economic governance and inflation has been brought down to around 4%. The central bank has judiciously managed the liquidity by hiking Cash Reserve Ratio for banks and maintaining the higher interest rate. The monetary authorities are maintaining a fine balance between inflation and growth.

India has the potential of becoming a developed country by the middle of this century. The Planning Commission has indicated that investment in infrastructure needs to be increased from the current 5% to 9% of GDP in the 11th Plan period (2007-12) which entails an investment of about US$500bn. The government is taking initiatives in stimulating investment in infrastructure especially power, health and education and in improving agricultural productivity and connectivity. The government has recognized that the growth has to be inclusive and poverty alleviation measures are imperative. Such a huge investment in infrastructure will ensure the sustainability of the growth momentum of India in the longer run.

The government has a clear choice between inflation and growth. It is ready for slower growth but not higher inflation as this will affect large sections of Indian society. The Indian government expects economic growth to slow, for the first time in three years, as higher interest rates cool consumer demand for homes, motorcycles and electric appliances. Asia's third-largest economy is forecasted to expand 8.7% for the year ended March 31, 2008, the weakest pace since 2005. The government's growth estimate beats the central bank's 8.5% forecast and is almost in line with the average 8.8% annual growth in the previous four years, the best expansion since the country's independence in 1947.

The latest government data has also revealed that consumer spending, the main driver of the current growth, has been declining since interest rates began to harden, as evidenced in declining credit growth since last year. But data on consumer expenditure in relation to investments since 2003-04 suggests that even with a steady increase in both, investments have been the consistent driver of growth. High interest rates have dampened consumer expenditures but not investments. But softening interest rates alone will not boost consumer demand since the real issue is the uneven spread of purchasing power. Exports have helped lift output so far, but the strong rupee and a weak global economy will put tremendous pressure on exports.

However, despite the slowdown the pace of economic expansion will still be the quickest after China among the world's major economies. And it may remain so even if the U.S. suffers a recession as India's growth is being driven by the spending of a middle class of over 200mn people. The growth is slowing down mainly because of the higher real interest rates. Whether the US slips into recession or not, the structural drivers of India's rising potential growth remain intact. With the domestic savings rate of around 34% of GDP, economic growth at around 8-8.5% is possible in India even without robust foreign inflows. Moreover, with exports representing just 16% of GDP, India is less vulnerable to US slowdown than most other emerging markets. India’s dependence on the US is minimal because India’s exports to the US are just 2% of GDP and the export basket largely consists of non-consumer goods and services.

Given that the investment typically chases growth, a potential recession in the US will possibly motivate large institutional investors to allocate assets to the emerging countries like India. Though the Indian market is not cheap even after the recent correction, the likely inflow of foreign portfolio investments into India will keep the market buoyant in the months ahead.

 

 


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