The services sector, which is driving growth of the Indian economy, is expected to slow down due to a decline in overall business prospects, said the Confederation of Indian Industry (CII). This is despite the fact that a sample survey of 225 firms in the services sector has recorded quarter-on-quarter growth in net profit.
The trends in the services sector, which contributes more than 55 per cent of India’s output, will have major implications for growth in the coming year. The recent data on specific services sector activities give a mixed picture in the study released by the CII. While there has been a sharp drop in indicators such as tourist arrivals, air freight and passenger movements, growth in railway traffic and cellular subscribers has been holding up. In banking, the deposit and credit growth has now begun to slow down.
An analysis of 225 companies in the services sector revealed that their topline continued to grow at over 33 per cent, while the growth in their bottomline accelerated from 10.1 per cent in the September quarter to 23.4 per cent in the December quarter.
However, the slowdown has been very pronounced for the manufacturing sector.
The CII, in a sample of 324 companies, found that the manufacturing sector is experiencing a serious downturn. The growth in net sales of companies declined from 32.4 per cent in the quarter ending September 2008 to 6.6 per cent in December 2008.
For the manufacturing sector, it has been a rough ride because interest expenses and the cost of power and fuel have continued to grow rapidly and hence this sector needs government help to survive, said the CII study. The CII has also suggested that in the face of fall in the industrial growth the Reserve Bank of India (RBI) should further reduce rates as inflation is below 5 per cent.
The economic slowdown has also lead to increase in fears of default and rising risk aversion among banks. This has lead to some slowdown in credit growth, especially to the small scale sector. The year-on-year growth in bank lending has dropped from a peak of 29.4 per cent in October 2008 to 22.1 per cent as of January 16, 2009.
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Owing to the current slowdown and decline in the aggregate demand, the government has had to take counter-cyclical measures by increasing its plan and non-plan expenditures, which means that the government will exceed its targeted fiscal deficit in 2008-09, the report said.
The CII said that the measures by the government that will have an impact on the deficit, include salary hikes under the Sixth Pay Commission, farm debt waiver, increase in major subsidies, reduction in excise and customs duties and measures to support the exports, housing, Micro Small & Medium Enterprises (MSME) and textile sectors.
However, the CII report went on to say that with the inflation and interest rates falling, the government should not have a problem in raising additional funds to finance the deficit.