Growth next year – Optimism and Pessimism

FOR IMMEDIATE RELEASE
(Free-Press-Release.com) May 6, 2009 --

This year, we see a number of people questioning India’s growth story. After a very successful year, where the growth rate was recorded at 9.6 per year for 2007-08, the predictions for 2008-09 are subdued. The government itself admits that growth will now be 8.7 per cent, while some others have predicted that growth will be a little below 8 per cent. Why this pessimism? Especially when we see the dizzy pace of growth in the last five years. And the fact that India continues to attract large investments from foreign and domestic investors. The Savings rate is at an all time high, foreign exchange reserves have crossed the 300 billion dollar mark and industry is growing at nearly 11 per cent this year. In this context, it seems ironic that we should contemplate a slowing down of growth at this point in time. Actually, growth this year should be upwards of 9 per cent.

However, let us first look at the reasons for some people predicting a slower growth rate this year. A lot of this gloom comes from the suspicion that the US economy is sliding down. In a globalised world, the ramifications of any slowdown in its largest economy are real and countries that trade with the US would indeed see a drop in exports. The other reason for a fear of slowdown is the appreciation of the Indian rupee. At first the rupee appreciated against the dollar and now is also strengthening against the British Pound. This again is something that could result in slower growth of exports in rupee terms. Such a trend affects sectors that are export oriented and people suspect that textiles, Information Technology and the mineral sector will get negatively impacted. Finally, there is inflation. Prices have been going up and the inflation figure is at a 40 month high. Rising prices tend to curb consumption and therefore the fear that lower demand would result in lower production.

However, each of these is an incomplete argument. While it is true that the US economy is not healthy at the moment, it would be premature to call it a firm long term recession. Also, India is not as vulnerable to the US as some other countries, including China are. Also, India’s trade has been rising steadily and lower exports to the US do not automatically mean a lowering of total exports. India’s trade has been diversifying and this trend is bound to continue. The export target for this year is 200 billion US Dollars, and there is all likelihood that it would be achieved easily. Also India is not entirely dependent on investment from the US. There is large domestic investment coming in addition to investment from other countries too. Also a pressure on US firms to cut costs would lead to larger investments to countries like India, meaning that a recession in the US would actually work to India’s benefit, especially in the outsourcing sector. Some firms are going to cut costs as they find US orders drying up. But these are only a handful of IT companies that impact a few thousand people.

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