Shafey Danish
Last year, around this time, the Finance Minister P Chidambaram described the coming year with the phrase “optimism with caution.” The growth outlook was positive; India, he said, would meet the 11th plan target of 9% growth rate.
The country was already notching up a growth rate of 8.7%. Inflation was moderate, at 4.4%. The only irritant was the rising fuel price on the back of historically high crude prices.
The Finance Minister did not anticipate the kind of economic downturn that the world is now facing. A year later, the picture has changed drastically.
Central Statistical Organisation has predicted a growth rate of 7.1% for the coming year. Even though this is significantly lower than last year, in the current economic situation it seems optimistic.
Five lakh jobs were lost in India during October – December 2008 alone. The number is expected to go up in the coming months. Around 10mn jobs will be lost in the exports sector alone, according to one study.
Not that companies have been spared the pains of the downturn. The third quarter results were bleak for most companies. Heavy weights, like SAIL, ONGC, Unitech, Kingfisher, Tata Motors suffered huge fall in their net profits.
Apart from exports, IT and real estate, which have been directly hit, other industries are facing the ripple effect of the global recession as well. The media, especially, has been badly impacted with ad revenues taking a nose dive.
IT companies, already bruised by the sudden decline in American business, are facing a new series of challenges after the Satyam fraud came to light. A slowdown in this sector will hit the Indian economy hard, as it has been one of its key drivers in the last few years.
The real estate sector, the second largest employer after agriculture, is also facing a drastic slowdown. The sector, which supports nearly 250 subsidiary industries like cement, steel, paints etc, is facing a fall in demand. Housing prices have fallen by 25% in some areas.
As recession sets in and it becomes more difficult for the middle class to invest in houses, the sector could see a further fall in demand. Though it is not facing the kind of problems that the US real estate sector is going through, a drastic slowdown in real estate growth could have dire implications for the economy as a whole.
Fiscal policy, one of the key areas of this government’s economic policy focus, is set for a toss. Only last year, Chidambaram had described the fiscal target set by the FRBM as “well within reach.” Fiscal deficit was set to go down to 1% from the 2.9% of last year. But with huge stimulus packages announced by the government, the deficit would only grow.
While last year the economic survey had predicted a slowdown in the US economy, it had not anticipated a recession. The extent and depth of the crisis is only now becoming apparent.
Since 2008, when the economic survey had predicted capital inflows to remain robust, FIIs have pulled the carpet from under Indian economy’s booming stock market, making it lose almost half its value.
The farm sector has not fared any worse than predicted. It is still in need of a second green revolution. Farmer suicides have continued unabated and the prices of food grains show no sign of coming down, even though inflation has moderated considerably.
One positive development since last year has been the decline in fuel prices, which are less than one third of their peak price.
Even though the economic outlook for 2009 remains grim, India is still better placed to weather the global storm than most countries. Significantly, its banking sector remains untouched by the contagion now dragging down the western financial sector.
Given that several crucial sectors remain heavily dependant on the US and European economies, unless these markets see a recovery, India would continue to perform below its full potential. After all, it is a small world.
