India may be the first in Asia to emerge from a downturn, helped by local consumption and a drop in commodity prices as financial turmoil sweeps the world, a senior economist at CLSA Asia-Pacific Markets said.
“We do expect the Indian business cycle to be the first to bottom in Asia. And, it should, in theory, be the first to emerge,’’ Sharmila Whelan, senior economist at CLSA, said in a telephone interview from Gurgaon on Tuesday. “The worst will be over by mid-2009 and by 2010, you should be able to see the next investment-led business cycle taking root.’’
The world’s second-most populous nation will benefit from the fact that its trade as a percentage of gross domestic product is 32.5 per cent, about half that of China and the European Union, according to the Asian Development Bank. India will also benefit from falling commodity prices, Whelan said.
Crude oil, copper and wheat has tumbled more than 50 per cent from records this year as the US economy declined in the third quarter by the most since 2001. India relies on oil imports for three-quarters of its energy needs.
“India stands to benefit significantly from falling commodity prices and therefore corporate profit margins should improve ahead of its peers’’ in the region, Whelan said. “While we are bearish on the short-term outlook, over the medium term we expect infrastructure spending to pick up and reinforce the investment cycle.’’
India’s economy may slow to a pace of 7.3 per cent this financial year ending March 31 and further to 6.5 per cent in the next year, she said. Gross domestic product grew at 9 per cent in the year ended March 31, 2008.
Rate reduction
India’s central bank had on November 1, for the first time since 1997, deployed all three of its main tools to shore up growth. It pared the repurchase rate to 7.5 per cent from 8 per cent, reduced the amount of deposits that lenders need to set aside as reserves to 5.5 per cent from 6.5 per cent, and cut the amount of cash banks must keep in government bonds to 24 per cent from 25 per cent.
Whelan expects further reductions by the Reserve Bank of India (RBI). She expects the repurchase to be cut by another 150 basis points and the cash reserve ratio reduced by an additional 100 basis points. A basis point is 0.01 percentage point.
“It is a fact, inflation has turned. That gives them scope to cut rates,’’ said Hong Kong-based Whelan, who is attending an investor conference organized by CLSA in India. “Obviously, growth is a concern.’’
India’s inflation rate fell below 11 per cent for the first time since May, to 10.68 per cent in the week to October 18 from a year earlier.
