Indian economy has been relatively better off in terms of the severity of the impact of the global financial crisis and the economic slowdown when compared to other countries. This has been largely due to domestic demand, which has been resilient compared to the external demand.
The first half of the current year clocked a GDP growth of 7.8% and the third quarter growth at 5.3% has clearly indicated a slowdown abetted by rapidly sliding manufacturing growth after its recent peak in April 2007. The services sector, contributing more than 55% of India’s GDP, has also started slowing down. Hence the uncertainty, which is looming large, is on account of industrial and services growth being under pressure as 26% of the GDP is contributed by the industrial sector and about 44% of the GDP is contributed by the non-government services sector.
What is the outlook going forward? There are some initial signs of a pick-up in demand. Earlier this month, we had some positive news from the automobile sector showing that passenger car sales had increased by 22% in February 2009 after several consecutive months of decline. The fiscal and monetary stimulus measures announced would also have its impact on the economy in the next few months.
The immediate measures for reviving growth could be a further cut in interest rates, greater infrastructure spending and low hanging measures that could help stimulate demand.
High interest rates have been a key factor in eroding corporate profits, and have left many small and medium enterprises in a difficult position. The RBI’s moves to add liquidity and lower interest rates have helped, but given that inflation is declining steeply, the RBI clearly has room for further cuts in the cash reserve ratio, and the repo and reverse repo rates. Further, given the current issue of the lack of demand, monetary stimulus is the immediate need of the hour as the fiscal room to provide for any major stimulus is limited. Moreover, improving access to credit at affordable costs is of paramount importance to create demand.
Implementation of large sanctioned projects could be speeded up considerably so that downstream industries could benefit from the investment demand. Further, a national level monitoring authority for supervision and facilitation of implementation of large projects would also help hasten implementation of large infrastructure projects. Projects like low cost housing can also be a major demand stimulus. While interest rates have been reduced, a further reduction in interest rates will also help lower mortgage rates to help potential home owners of these low cost housing facilities.
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In addition to the existing programmes in the areas of roads, ports, airports, power and urban transportation, the government should focus on rural infrastructure. In urban and semi-urban centres, low-cost housing projects are a huge opportunity.
India’s large rural economy, where more than 700 million people reside, should be seen as an opportunity. Greater penetration can be achieved in many sectors ranging from textiles to automobiles to agricultural inputs.
Financial services are under-penetrated in India’s rural areas. The rural economy provides a great opportunity for companies to increase penetration by providing innovative products that would provide small-ticket financial services at a lower cost. This would also help achieve the objective of financial inclusion and access to relatively low-cost finance to rural consumers.
The current economic environment also throws up new opportunities. Companies would have to focus on innovation to provide value for the large number of consumers at the bottom income scales. Rural markets are insufficiently penetrated for a number of consumer products, and there is large scope in tapping smaller towns and villages through innovative product design and marketing. Also, industry would have to focus on improving internal processes to aim for enhancement in productivity and overall efficiency.
The outside world too is not devoid of potential. For example, the stress on education and renewable energy in the US stimulus package can offer Indian companies additional avenues for growth. Similarly, several countries are increasing expenditure on infrastructure and construction activities, preserving demand for steel, cement and related equipment. At the same time, healthcare, pharmaceuticals, medical supplies and equipment manufacturers can benefit from greater attention to these areas. Financial restructuring in other countries is also bound to offer new business for Indian IT companies.
One is optimistic that the strength of domestic demand will help the Indian economy to recover ahead of the global economy. The last quarter of 2008 has been particularly difficult. The current year will be a challenging one, but I expect the economy to bottom out and begin its path to recovery soon if further demand stimulating measures are undertaken.
The author is Director General, Confederation of Indian Industry (CII)