Slower GDP growth on the cards for 2007

2007 THE YEAR THAT WILL BE

It was a dream run for India in 2006. For the first time in recent years, 9 per cent GDP growth looks within reach. Business Standard takes a close look at what 2007 could hold for the country.

Order books bursting at their seams, huge export growth, generous salary increases, massive investment plans, a booming stock market and buoyant tax revenues "" every possible indicator says that India's economy is firing on all cylinders.

On the back of three years of more than 8 per cent average growth, and more than 9 per cent growth in the first half of 2006-07, some economists warn that the coming year's GDP growth numbers will suffer a dip because of the high base effect. But their forecasts go no lower than 7.5 per cent growth.

The World Bank recently said that India's GDP growth would fall from an estimated 8.7 per cent in 2006 to 7.5 per cent in 2007, owing largely to the global economic slowdown. "But there is the potential for another 0.5 per cent to 1 per cent growth," said World Bank Lead Economist for India Dipak Dasgupta.

Also predicting a mild deceleration, Crisil has projected GDP growth of 7.7 per cent for 2007-08, down from its forecast of 8.3 per cent for 2006-07.

"After a three-year investment cycle, we could see a little reduction in investments," said Crisil's Chief Economist Subir Gokarn, adding: "At the moment, there is no sign of abatement in investments. If the investment cycle spills over, the growth could be well above 7.7 per cent."

There was a slowdown in industrial production during October 2006 (6.2 per cent, compared to 9.8 per cent in the same month of the previous year) but most commentators see this as a temporary blip. There was a sharp ramp-up of production, especially in consumer goods, during September in order to meet the festival season demand. This resulted in the October slowdown.

Most observers of the Indian economy do not see this as the start of a new trend, and predict that, when the numbers are out, November and December will be seen to have done much better.

The last period of rapid growth, in the mid-1990s, was brought to a halt when the Reserve Bank of India clamped down on credit growth (which had reached 22 per cent by the middle of 1995); and one danger today is that history could repeat itself ""the RBI has noted that credit growth has been in the 30 per cent range for the fourth year running.

Its hiking of the cash reserve that banks have to maintain has caused a sudden squeeze in the money market, and overnight money (in the call market) commanded 9.25 per cent interest on Friday "" a jump of about 2 percentage points in a couple of weeks.

As in 1995, the RBI is worried about the economy over-heating "" a worry that the finance ministry dismissed as unwarranted in its mid-year review of the economy, presented to Parliament last week.

Other than the RBI action on monetary tightening, a danger marker for the Indian economy in the new year would be a pricking of the asset price bubble.

The stock market has been see-sawing after a more than 40 per cent gain in 2006, and real estate prices have peaked; in some areas they have even declined.

Both could take away some of the wealth-effect that has encouraged consumer spending in recent months.

But as the curtain comes down on an eventful year, consumers show no signs of worry. After a year in which pay hikes averaged 22 per cent, demand has been buoyant, whether it is cars or mobile phones.

The government, riding on record increases in tax revenue, can afford to spend liberally while keeping the deficit under control"" and this generates its own demand.

Net tax revenue has over-shot all estimates, and during April-October 2006 was up 33.8 per cent, compared to the corresponding period last year. The quarterly numbers on government accounts show that spending too has gone up substantially.

Could a global economic slowdown, especially in the US, spoil the party? It is projected that the growth in global trade volumes would fall from 11 per cent in 2006 to 7.5 per cent in 2007. "That is still very good growth," said Dasgupta.

Crude oil prices, too, are not expected to swing too far from their present levels. Many countries consuming large amounts of oil are sitting on big oil inventories, which should help keep prices in check. Moreover, Indian consumers are well protected from any unusual spike as the government has a history of absorbing these increases without passing them on.

Inflation has been a worry point in recent weeks, with the increase in wholesale prices testing the 5.5 per cent upper limit set by the RBI at the start of the financial year.

However, much of this increase has been caused by primary goods, including agricultural products "" and many of these have shown signs of price moderation in recent weeks as supply has improved.

In other words, there are no real dark clouds on the horizon. As CII President and Ashok Leyland Managing Director R Seshasayee said, "There is more silver than darkness in the clouds."

For some observers, though, the absence of any real worry points is a reason for worry "" because unpleasant surprises come when they are least expected.