Saturday, February 28, 2009

India’s GDP growth slows sharply to 5.3%

Ref : Financial Times February 27 2009

Indian economic growth slowed to just 5.3 per cent in the last three months of 2008, its lowest growth rate in the last six years. India’s economy seems to have been hit by the global crisis far harder than our ruling politicians have thus far admitted.

The turn of events suggests that a sustained period of 9%+ growth will not be easy for India. Just because China did it for decades does not mean that we are already there.

Even though we are different from China in that we are not so heavily dependent on global trade, the parts of the economy which have generated rapid growth in the past decade, namely the IT and BPO sector are global. At the same time, in the last three months of 2008, other sectors too have not done well. Manufacturing declined 0.2 per cent, owing to insuficient domestic and global demand. Agricultural output also shrank by 2.2 per cent.


The sharp slowdown will increase pressure on the RBI to cut interest rates. Although the RBI has lowered its benchmark rate by 350 basis points in the last few months, falling inflation means real interest rates are realtively high.


But for higher government spending, growth would have been even slower. But this is not a sustainable solution. We know that government spending in our country is highly inefficient. Moreover, the government has little room for further stimulus given its already large fiscal deficit, estimated at 11.4 per cent of GDP. And even this could be an understated figure as our politicians and bureaucrats are adept at playing with numbers.

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