Indian Economy Forecast,The slowdown puts the onus on the government to start rebuilding India’s rickety infrastructure,

IN 1571 the Mughal emperor Akbar moved his court from Agra to Fatehpur Sikri, where he built a sandstone palace in the middle of nowhere. In the 1980s a similar urge gripped K.P. Singh, chairman of DLF, India’s biggest developer. His father-in-law had built 23 neighbourhoods in Delhi. Mr Singh started work on a new city ten miles away, in the wheat fields of Gurgaon.

Nowhere in India embodies the country’s aspirations as starkly as the town he founded. DLF’s concoction has attracted copycat developers and almost 150 of the world’s Fortune 500 companies. In the Aralias, the city’s most exclusive apartment block, 6,000 square feet can cost up to 100m rupees ($2m). That buys a view of Gurgaon’s golf course, judged India’s best, where members stir their fresh lime sodas with swizzle sticks shaped like long irons.

But just as Fatehpur Sikri was eventually abandoned for lack of water, so some of Gurgaon’s developers are suffering from a lack of liquidity. Even DLF has suspended construction of 12m square feet of office-space across India and 4m square feet of retail space. Rajeev Talwar, the group’s executive director, says it may also slow down some residential projects.

Reactions like this are taking their toll on India’s economy. Output grew by 5.3% in the fourth quarter of 2008, compared with the same quarter a year ago, its slowest pace for four years. The figure was well below expectations. On March 4th the Reserve Bank of India (RBI) responded by cutting its rates by half a percentage point, on top of the 3.5 points cut since October.


India had felt one step removed from the global slowdown. Compared with its neighbours in Asia, it relies little on exports, which amount to only 21.2% of GDP. And it relies less than the overstretched economies of eastern Europe on foreign capital: its gross saving rate reached 37.7% of GDP in the past fiscal year.

But India does not mobilise its saving well. Households account for almost two-thirds of it. But they put more than half of their spare funds into physical assets, such as homes, rather than the financial system. Of the remainder, 11% is held in cash and 55% is deposited in the banks, which are now lending almost a third of their deposits to the government.

Thus despite India’s prodigious thrift, its companies miss foreign investors now they have fled. Of the $135 billion they raised in the fiscal year to March 2008, $40 billion came from foreign lenders and $22 billion came from a stockmarket buoyed by foreign enthusiasm, according to Tushar Poddar of Goldman Sachs. DLF itself raised $2.2 billion in June 2007 in what was then India’s biggest initial public offering.

Those sources of funds have now dwindled, forcing companies to turn to the country’s banks. In a report in January, the RBI calculated that the flow of credit from India’s banks had increased by $7.6 billion so far this fiscal year, compared with the same period of the previous year. But this failed to compensate for the $26.8 billion shortfall in funds from other sources, such as foreign loans and public issues. “We are ourselves now changing over to public-sector banks,” says DLF’s Mr Talwar, but it is not easy. “You’ve got to convince the banks…It is a little time-consuming.”

Fear and loafing
India’s banks are flush with cash, but they are also cautious, fearing a rise in the non-performing loans that crippled them in the 1990s. They may also be tempted by “lazy banking”, holding safe government securities, which should increase in price if the RBI keeps cutting rates.

If the banks insist on buying such bonds, then it will fall to the government to borrow and spend what is needed to keep India’s economy turning. It is doing its best. The central government had budgeted a fiscal deficit of 2.5% of GDP for this fiscal year. Last month it admitted the gap would be 6%. Add the red ink of the state governments and various expenses reported “below the line” and the deficit will exceed 11% of GDP this year. On February 24th Standard & Poor’s put a negative outlook on India’s credit rating (BBB-, the lowest investment grade). The same day, the government cut taxes again.

The economy is enjoying a fortuitous fiscal boost from measures taken long before the crisis ballooned. The central government’s legions of employees, for example, have received a pay rise that will be matched by some of the state governments in the next fiscal year. Small farmers had their debts cancelled, and money has flowed to rural districts thanks to India’s employment-guarantee act, which is supposed to offer 100 days of work to every household that needs it.

The government has also announced three stimulus packages. It will spend an extra 200 billion rupees this year on the schools, roads, power plants and other development priorities set out in its latest five-year plan. It has also told the India Infrastructure Finance Company Limited (IIFCL), a government-owned financial company, to sell bonds worth 400 billion rupees. The first tranches of bonds, offering 6.85% and a sovereign guarantee, were oversubscribed. The IIFCL will lend this money to banks, which will then pass it to infrastructure projects worth as much as 1 trillion rupees.

In other countries, fiscal stimulants are raising the spectre of “bridges to nowhere”. But in India, extra infrastructure is sorely needed. During the boom, India’s industry expanded faster than the electricity grid’s capacity to power it; its air traffic outgrew its airports; and cars rolled off the production lines faster than the roads could accommodate them. In DLF’s Aralias in Gurgaon, each flat is allotted three spaces in the car park underneath. But many residents buy more.
The company looks after the roads, storm drains, sewer system and the flora within “DLF City”. But outside, the state authorities have struggled to keep pace. Gurgaon’s roadsides are disfigured by deep trenches, where the trunk sewer line waits to be laid.

Now that India’s economy is slowing and competition for men, materials and money is slackening, India’s public infrastructure may have a chance to catch up. In Gurgaon the Delhi Metro Rail Corporation is building an elevated railway that will connect the upstart city to the capital. It is a public project backed by the governments of India, Delhi and the neighbouring state. It is also now the busiest construction site in the city.

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India Economic Outlook Contents
The India Business Forecast Report features explicit BMI economic forecasts for India, with supporting commentary and analysis, for end-2013, 2014, 2015, 2016 and 2017 set against Indian government views. Underpinning our India forecasts are key assumptions for the global economy through end-2017, covering growth, inflation, employment, trade and investment, interest and exchange rates in the US, Japan and the Euro-zone.

Coverage of Key Economic Issues in India
Economic Activity in India Real GDP growth; industrial growth; employment growth; inflation and consumer prices; consumption (indicative wages, retail sales, consumer confidence)
Fiscal Policy in India Current macroeconomic strategy and implementation policies; government finance (revenue, expenditure, budget balance); tax reforms
Monetary Policy in India Interest rate trends (bank lending and deposit rates); inflation (retail price inflation, consumer price inflation); exchange rate policy in India; Indian currency controls; influence of foreign direct investment inflows; exchange rates and foreign exchange reserves
Balance of Payments in India Merchandise trade (exports, imports, trade balance); current account balance
Foreign Direct Investment in India Foreign direct investment approvals and inflows; the foreign investment climate
Indian External Debt Debt profile (short- and long-term debt; public and private sector exposure)
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ADB Lowers Growth Forecast for India's Economy in 2008-2009

HONG KONG, CHINA - India’s economy will experience a marked slowdown in the 2008 and 2009 financial years, ending its run of five consecutive years of very high growth, the Asian Development Bank (ADB) says in a new major report.

The Asian Development Outlook 2008 Update (ADO Update) forecasts India’s growth rate to decrease to 7.4% in FY2008 and decelerate further to 7.0% in FY2009. The new figures are down on ADB’s April forecasts of 8% and 8.5% respectively, and much less than the impressive 9% growth posted in the last fiscal year ending March 2008.

The report notes that current developments are challenging India’s strong growth performance of recent years. Emerging capacity constraints, continued rapid expansion in credit, and an increase in global commodity prices have combined to trigger a spike in domestic inflation.
The report warns that global commodity prices and domestic demand growth supported by price subsidies will continue to place upward pressure on prices. Further, the government’s attempts to rein in inflation through monetary policy tightening combined with ad hoc interventions, including reduction in customs duties and bans on export of essential commodities, are having limited impact. Real interest rates have actually fallen and the projections for the inflation rate, based on the wholesale price index, have been adjusted upward to 11.5% in FY2008 and 7.5% in FY2009.

“The Indian economy is now at a critical juncture where policies to contain inflation and ensure macroeconomic stabilization have taken center stage,” says Ifzal Ali, Chief Economist of the Manila-based multilateral development bank.

GDP growth at 7.9% in the first quarter of FY2008 (April-June), saw the slowest expansion in three and a half years. The slowdown was broad-based. The most pronounced slide was in industry, dragged down by a halving in the manufacturing growth rate.

Higher interest rates and a weakening global and domestic outlook have caused companies to scale back investment. Growth in investment will continue to be limited by faltering business confidence, fewer options for foreign financing owing to a drop in risk appetite by foreign financial institutions, growing difficulties in securing domestic bank financing, and the need to maintain tight monetary conditions and high interest rates to bring down inflation.

The trade and current account deficits have grown wider in recent years, reflecting the impact of escalating oil prices and the expansion in non-oil imports, led by rapid growth in consumer and investment demand.

Net capital inflows are on a much lower track than a year ago as foreign exchange reserves have fallen by $13 billion in the first five months of FY2008 (through end-August). Nevertheless, the accumulated reserves of over 20% of the fiscal year’s estimated GDP provide a very generous cushion against external vulnerabilities.

The report notes that the escalation in oil, fertilizer, and food subsidies, as well as other off-budget liabilities has created large fiscal imbalances.

“Cutting the subsidies is a daunting task, but maintaining them would imperil any return to the high-growth path of recent years,” says Mr. Ali.

The report says that India faces a serious dilemma in macroeconomic stabilization. On the one hand, further monetary tightening could threaten growth objectives. On the other hand, financing the current level of subsidies will increase the pressure for rapid credit expansion which, unless checked, will lead to higher inflation. Additional tightening in policy, raising both nominal and real interest rates, will be likely required.

“Dealing with rising prices and a worsening fiscal situation, as well as the need to adopt structural reforms to fulfill the country’s enormous economic potential present a difficult task for the country’s economic managers,” says Mr. Ali.

Indian economy dragged slow by global slump, growth forecast may fall flat

BEIJING, March 8 (Xinhua) -- The global financial storm has taken a toll on India, one of the fastest growing economies in the world, dragging slow all sectors of the country remarkably in the outgoing fiscal year.

Asia's developing economies such as India are suffering more than expected from the global slowdown and must take steps to offset the impact, said Haruhiko Kuroda, president of the Asian Development Bank last month.

Many economists doubt whether the government's forecast of a 7.1 percent growth rate in the 2008/09 fiscal year ending March 31could be met.

An article carried by The Economist last month even asserted that a hard landing for the Indian economy, which means the economy goes directly from a period of expansion to a recession, is imminent if something is not done.

Not too long ago, India caught the eye of the world by chalking up a growth rate of over 9 percent annually for three consecutive years.

With an average annual GDP growth rate of 5.8 percent for the past two decades, the economy is among the fastest growing in the world.

But this year, the country is beginning to feel the full impact of the global slump.

Official data show the economy has moderated to 5.3 percent for the December quarter, well below forecasts of 6.2 percent and the previous quarter's growth of 7.6 percent.

It was the slowest growth since the March quarter of 2003.

The manufacturing sector fell 0.2 percent in the October-December quarter from a year earlier.

The farming sector, which provides a livelihood for some 60 percent of Indians, contracted 2.2 percent year-on-year.

The textile industry, India's No. 2 foreign exchange earner, is facing a dilemma in cutting 500,000 jobs till April 2009.

India's famed outsourcing business with a value of some 40 billion U.S. dollars a year, is also reeling from the consequences of the global slowdown though the sector showed somewhat resilience.

The industry is expected to grow 16-17 percent in the current financial year ending March 2009, far below the originally projected 21-24 percent. Revenues grew 28 percent the previous year.
In the United States, where most of the service clients of the Indian outsourcing firms come from, 70 percent of companies with such business abroad have started to negotiate a lower cost.

Moreover, India's outsourcing business is facing challenges from other countries including the Philippines. Apart from lower pay, Filipinos are also said to have the advantage of more tender English, as some native English speakers suggest.

India has also seen its tourist arrivals drop in recent months for the first time since 2002.

Foreign tourist arrivals to India dropped 12 percent to 522,000in December, compared to 596,560 in the same month of 2007.

As tourism contributes more than 6 percent to India's GDP of 1 trillion dollars and employs 53 million people directly or indirectly, the drop has jeopardized the livelihood of thousands of people.

A Labor Ministry survey estimated that half a million jobs were lost in India from September to December last year in the sectors of mining, metals, textiles, automobiles, transport and information technology.

Analysts say the worsening economic environment would lead to political turmoil or social unrest in some countries.

With only a month to go before the general election in India, the state of the economy will surely feature prominently in the balloting, especially for the 200 million people living below the poverty line.

About 32 percent of people in a recent nationwide survey cited the economy as their biggest concern ahead of the parliamentary elections.

The government has taken a series of steps including tax breaks and slashing key interest rates five times since September, as well as pumping in billions of dollars to ease the economic pain.

But ADB chief Kuroda said more investment in infrastructure is needed to promote economic growth, particularly in such countries as India, and regional trade should be boosted to reduce reliance on ailing markets in the West.

Some analysts also suggested economic reforms, boosting domestic demand and adjusting monetary policy as a remedy.

India Economy Forecast, 2009,

New Delhi, 16 Dec. 2008 started out well enough with growth figures approaching 10%. However, with the massive financial troubles which began towards the end of 2008, 2009 does not look quite as good. The Asian Development Bank (ADB) has projected growth of a mere 6.5%. Previously, it had forecast 7%, down from another earlier estimate of 7.4%.

ADB stated, “India, South Asia's most dynamic economy in recent years, is reeling from the direct effect of the global financial crisis on its banking systems and financial markets. The growth projection for India has been revised down to seven per cent in 2008 and 6.5 per cent in 2009, from 9 per cent in 2007.”

In the first week of December, the World Bank anticipated the Indian economy would grow by 6.3% in 2008 and 5.8% in 2009.

It realized a 7.8% expansion in the first half of this fiscal year against 9.3% a year ago. The economy grew by 9% for the entire last fiscal year.

Inflation has been an ongoing threat in India, especially when it reached a peak of 12% in early August, 2008. Much of what drive this inflation is the country’s rapid growth and rising oil prices. Oil has fallen considerably since then, easing inflation.

Manufacturing is expected to be hit in 2009 due to a decreased demand as a result of the global downturn. India’s growth is not totally dependent on the West, but the slumps in the US, Europe, and even the Far East will be felt in India’s exports.

The Indian government will need to accelerate its reforms and push for more investment if it wants to maintain good growth rates in the face of the global slowdown.

In a news conference with the World Economic Forum (WEF), CII director general Chandrajit Banerjee said, “"There is a pressure on bottom lines (of companies). Production is down. We do see economic growth moderating to 7.4-7.8 percent this fiscal.”

"Since inflation is down, we expect more fiscal and monetary measures to give a momentum to growth. The government should increase expenditure in infrastructure sector and put on-going projects on the fast track," he continued, but dismissed fears of large-scale corporate lay-offs.

The worldwide credit crunch has led to foreign investors dumping shares amounting to more than $12.5 billion, and the rupee has fallen in excess of 20%.

The WEF said, "It (global crisis) could also weaken the balance sheets of the financial institutions, cause a further fall in share and asset prices, and challenge the macroeconomic situation due to shrinking global growth.”

In November, Prime Minister Manmohan Singh warned that the global financial crisis may be worse and longer than many had expected, but that the government would take the necessary monetary and fiscal action to protect growth in India.

Charles Cole,