India - The news get worse

T.N.Ninan

Forecasting is a hazardous business, doubly so when there is turbulence all around. Still, it is worth noting that when most Indian forecasters (in the government and outside) were still talking of 8-plus per cent growth this financial year, many international forecasters had started talking of 7-plus per cent. The Prime Minister, whose comments on the economic situation in recent weeks have been the most realistic, has lowered his expectation for the current year to 7-7.5 per cent, which is the lowest Indian forecast so far. As for next year, the International Monetary Fund has in the space of a month lowered its forecast from 6.9 per cent to 6.3 per cent—a range where perhaps only one Indian forecaster has dared to tread so far. As the forecasts drop steadily lower, it is clear that Indian observers are still mixing a liberal dose of hope with their knowledge of reality. Perhaps the time has come to become more clear-eyed about the extent of the bad news.

While the financial crisis first hit US charts in the summer of 2007, the watershed was September 15, 2008, when Lehman Brothers went under. In India, the first four quarters of the crisis (July 2007-June 2008) created only mild flutters, and the news was still pretty upbeat (growth in the April-June quarter was a healthy 7.9 per cent), with the main worry being inflation. Then the tide turned: the industrial production index tanked in August, corporate profits for the July-September period fell by a staggering 35 per cent, and business confidence dropped off the cliff. Oil prices peaked in July, then fell by an astonishing 60 per cent in just three months. It is amazing to recall that in the July monetary policy announcement, Reserve Bank of India actually jacked up interest rates!

But even the July-August-September phase now looks like a cakewalk, compared to what October has been. Sales figures have caved in for most automobile companies, Reliance is going easy on the commissioning of its new refinery, and lay-offs are taking place in sectors ranging from textiles to diamond cutting, from truck companies to airlines, and from investment banks to real estate firms. Mutual funds have seen a near-20 per cent drop in the money they manage, hotels admit a similar 20 per cent drop in occupancy though the reality could be worse, the index of shipping freight rates has dropped 90 per cent, and real estate transactions have dropped by a half. What began as a warning breeze spreading some chill in financial circles is now a full-fledged storm battering the real economy.

If you look at the broad numbers, industrial growth in the first five months of this year was 5 per cent, compared to 10 per cent a year earlier. If the remaining seven months get worse, not better, then industrial growth will drop further. Agricultural growth is unlikely to be more than 3 per cent. Between them, these two sectors account for nearly 45 per cent of the economy, and their combined contribution to GDP growth this year will be under 2 per cent. If overall growth is to be 7 per cent, services have to grow by 9 per cent. But there is a slowdown in all the important services sub-sectors (hotels, trade & transport, communications & information technology, insurance & financial services, construction). Only government services will grow, because of the Pay Commission hand-out. Over-all growth in such a scenario could struggle to reach even the lower end of the Prime Minister’s range of 7-7.5 per cent. However much we may hope against it, don’t rule out the possibility that the IMF’s forecast for next year comes true this year itself.