The signs are certainly positive, but a lot will clearly depend on how the global economy fares as well as on when banks in the country resume lending in a big way.
AJIT RANADE
Group Chief Economist, Aditya Birla Group
“There is still a lot of pain, nor is the credit famine over, but there’s been a turnaround in several sectors, the impact of the fiscal stimulus is yet to come, oil prices are lower ... it’s overall positive”
It’s always tough to strike a middle path between the hopelessly optimistic Pollyanna’s who see resurgence in every uptick of the Sensex, and the ever pessimistic Cassandra’s who saw tragedy unfolding much before the sub-prime crisis. Consensus these days seems to be elusive, and all evidence is treated as suspect. To add to the forecaster’s woes, last year saw such unprecedented volatility that nobody can dare to predict beyond three months. But it is possible to go beyond mere tea leaves.
Here are some solid facts picked up randomly:
- The Consumer Price Index (CPI) was showing double-digit inflation for most of past twelve months; add to it, the farm loan waiver and the wages paid on the rural employment guarantee scheme, and this means that the terms of trade have tilted firmly towards food producers and the rural economy;
- The Purchasing Managers’ Index (PMI) is now close to 50 which indicates the beginning of expanding activity; China’s PMI has already crossed 50;
- The Centre for Monitoring Indian Economy (CMIE) reports that the quarter-on-quarter pace of increase of investment in new projects has picked up since December;
- Non-oil imports, an important leading indicator, are doing moderately well;
- The FMCG sector is showing robust growth (look at the stock price of their leader!), with most categories growing between 8 to 25 per cent; even some auto majors have benefited from rural demand; tractor-makers are certainly not complaining;
- The cement sector is showing strength in dispatches as well as prices; the core sector index has risen in February compared to the previous month;
- Telecom subscribers continue to grow, as if they never heard of the global recession.
Add to these sundry sectoral facts, the slow-release delayed-impact of the fiscal stimulus. Lower energy prices this year, plus the big impact of Krishna Godavari Basin gas production, is a definite plus, especially for fertiliser and power production. It will also substantially reduce the import bill portion of the fertiliser subsidy, and will help keep a check on the trade deficit.
As for further policy push, our monetary policy still has a lot of unused ammunition if required, unlike in the West.
These somewhat rosy facts from a few sectors, are not intended to hide the real pain in sectors like gems, automobiles, real estate and, to a lesser extent, textiles. Exports are hurting, although the weak rupee is providing some reprieve. The credit famine is still not over, even though the banks are filled to the brim.
On the whole, however, the score is positive, and the slowdown itself is slowly winding down. Of course, there is plenty to keep worriers busy — the prospects of the return of inflation, the widening trade and fiscal deficits, increased foreign indebtedness and the inadequacy of exchange reserves, the dangling sword of a rating downgrade. And there is the distinct possibility that elections will produce a fragile coalition. But the economy’s record of resiliently rising despite a multiple change in governments is well-established. So let’s keep the faith and announce the turnaround.
SAILESH JHA
Senior Regional Economist, Barclays Capital
“Unlike the slowdowns of the mid-’90s or the early 2000s, tight liquidity and the global contraction will hurt growth. GDP will grow at 4 per cent in 09-10 and the rupee will depreciate moderately”
Our outlook for 2008-09 GDP growth is one of further weakening, with the risks tilted to the downside. We expect deflation to be persistent, starting now. Our growth estimate for 2008-09 is 6 per cent while our growth forecast for 2009-10 is 4 per cent. So our outlook for the current year is lower and the uncertainty around our 2009-10 forecast is large — the downside risks to our forecast could be as high as 200 basis points. In addition to the loose fiscal and monetary policy, we expect the RBI to allow the real effective exchange rate (REER) of the rupee to depreciate modestly to support growth.
The main reasons for our soft GDP growth forecast and our high degree of uncertainty for 2009-10 are that, unlike the slowdowns seen in the mid-1990s and the early 2000s, this time around, the tight liquidity conditions will hamper growth and the contraction in economic activity will be broad-based geographically.
The combined fiscal deficit of the central and state governments, in 2009-10, will be around 10-11 per cent of GDP, which is similar to our estimate for 2008-09. But much of the impact of fiscal policy on economic activity will materialise only in 2010. Given the limited ability of fiscal policy to have an immediate effect on growth, the uncertainties over the policy rate cuts getting transmitted to increased economic activity, and the deflation by April 2009, the real effective exchange rate could depreciate further in the next few months — a depreciation in the REER, which perhaps closely tracks the fundamentals of the Balance of Payments, could be tolerated by the government.
The limited impact of monetary easing and the impact of tight credit conditions on growth are areas of concern. We expect these trends to continue over the next few quarters. Although the RBI has cut policy rates significantly since October 2008 and M3 growth has started to recover, liquidity continues to drop along with GDP growth. In addition, because the current expansion (which started in 2002) has been much more broad-based geographically, the downside risks are larger when the economy slows. We expect growth in both developed and developing states to decelerate sharply in 2009-10.
The next stage of monetary policy loosening could see some depreciation of the rupee in REER terms. The impact of M3 growth on GDP growth is small, has significant lags and is typically short-lived. As a result, in addition to policy rate cuts, the RBI may allow the REER to depreciate in order to limit downside risks to growth. The RBI may be using a monetary conditions index to gauge the pace of policy rate cuts and further REER depreciation.
We believe that deflation will be persistent from April to at least October 2009.
The author is responsible for Barclays Capital’s coverage of macro-economic research on the Indian sub-continent and Indonesia
