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India's slowdown

Posted by: Manjeet Krpalani on March 13, 2008

As the US economy brakes, it is causing the meaningful economies of the world to stall with it. India and China, which are both supposed to balance the agony of the groaning giant on the Atlantic, are having a deceleration of their own. China’s rising inflation – 8.7% - has already caused concern. Now India is seeing dangerous inflationary signs – and clear indications that its dizzy-high economy is coming down to earth. Economists like Rajeev Malik of J.P. Morgan have cut India’s growth estimates for 2008 to 7% from over 8%, while Ridham Desai of Morgan Stanley are warning of a 50% decline in the Indian stock market from its peak of 21,000 earlier this year. “The factors that could cause a bear market include a combination of bad global financial markets and policy errors at home,” says Desai in a March 13 report.

Inflation has crossed 5%, way past the comfort levels of India’s conservative central bank which has been working overtime this past year to keep it below that level. And because Indian politicians have refused to lift the subsidies on oil and diesel for the domestic economy, fearing a political back lash, the country has not yet seen a real inflationary hit yet.

As for the economy - the combination of the US slowdown, an over-heated stock market, high interest rates, and a consistent lack of reform from the ruling Congress government in New Delhi, are taking their toll. Industrial production has almost halved to 5.3% now from Jan 2007; ditto with manufacturing growth which is down over 50% from last January’s 12.3%. Consumer durables, which were leading the great domestic consumption story, have seen decelerating growth. What’s in imminent danger are the huge capital expansion plans from corporate India – not only from the continuing lack of infrastructure that’s creating more chokepoints than ever before, but also from the foreign money that’s feeling the pressure of a looming US recession and is unlikely to pour it as liberally into India has it has before. In addition, Indians are leveraged – home and consumer loans are aplenty, and in a deteriorating environment, will be hard to maintain.

Corporate India grumbles about how expensive it is to do business in India – apart from low-end labour, everything is expensive. Real estate, interest rates, talent. Even food is now becoming dear. How to stay competitive with China or anyone else?

This glum mood can be made to lift – with a little imagination from New Delhi. For the past four years, the administration has hidden behind India’s dazzling growth story, reflected in its sky-high stock market which attracted so much foreign attention. It’s not been pressured to reform, and it hasn’t.

Now, however, it’s the time of reckoning. There’s been no reform in key sectors like agriculture (resulting in crop failures, farmer suicides and poor distribution of food), infrastructure (causing blockages in transport, real estate, town planning), education (creating a severe skills shortage) and healthcare (malnutrition and poor health is stunting the physical and mental capacities of young rural Indians). Just at the time the economy needs an extra internal edge to help it ride out this global malaise, India will surely be held back.

However, no one is expecting a change. The Congress party, which leads the coalition in Delhi, is weak, populist, and preparing for elections in 2009 – maybe earlier. Reform is the last thing on its mind. It’s a shame; for India’s hard-earned growth will simply slip away.

Reader Comments


March 13, 2008 2:36 PM

India has enjoying good growth in IT service for long time, but the growth cannot going ferever.

The problem for India is that it depends on too much on service without too much agriculture and industry productions.

But India has one big potential: Its agriculture. It has more arable land than China, but its grain production is only about half of China's. Unfortunately, agriculture is out of India government's focus. Developing agriculture can not only be translated as economy development but also can bring a lot rural Indians out of poverty.


March 14, 2008 3:05 AM

Actually, China's arable land is larger than commonly thought.

But more importantly, most of China gets two rainy seasons - one in spring and then the regular asian monsoon.

On the other hand, much of India goes totally dry by March or April. Many smaller rivers run dry just a few months after the monsoon.

But virtually all of China's rivers are all-season rivers.

Water can be more important than arable land.


March 14, 2008 3:26 AM

I totally agree with Steven here. As someone who has been tracking the Indian economy for a decade(as a student earlier and now as a research associate with a bulge bracket investment bank), I forsee some realy tough times for the India over the next two years.
The Indian "growth" story has already been factored into the stock prices...what has yet not been truly factored in is the eventual slowdown of the Indian economy. Remember the cardinal rule - "What goes up has to come down...& what goes up faster, comes down even faster and harder"


March 14, 2008 10:20 AM

My opinion is that Indian IT industry (the engine of the growth) is severely affected. A huge demand combined with a lack of skilled workers translated into low quality software, missed deadlines and increased costs for the clients.


March 14, 2008 12:43 PM

I agree that India has a range of inherent problems unattended to that are threatening to cripple the growth. and yeah, Stocks are overpriced for the P/E's, RealEstate needs to be a bit regulated to help people from all income levels, decentralization is a must etc etc.

But I dont see any reason why Manjeet wants to view it/started the article from 'US Slowdown' perspective.


March 14, 2008 1:16 PM

It is good that people just have opinion about India and not a statement :-)

Steven has pointed out very correctly that there are many sectors where development is possible and should be aimed at. Now is the time to consolidate resources and organise efforts in right direction.

Blind growth in one direction can be very dangerous. It is always good to learn from others' mistakes.


March 14, 2008 1:59 PM

India's economy is not based on the GDP, inflation or Stocks. It's real wealth is hidden in each and every family's reserve the Gold. A below average Indian family carries as much as 500 grams of Gold. And it multiplies by 1000 for each level. I am very sure even the entire world falls into zero the Gold saves the India. It sounds simple and silly but it is a basic fact. The only finch with inflation is Grocery prices. Else Indian can survive it's own of everything.


March 14, 2008 3:00 PM

Why don't western journalists mention the pernicious, pervasive corruption at every level that is crippling the country. They keep evading the corruption issue in a series of euphemisms ('reform food distribution, reform civil service') but they never come out and say really how bad corruption is and what a tragic toll its taking on a country.

India is a corrupt country. Admit it. Report it. Do Indians a favor, will ya? I am an Indian and I will be really happy to see this detailed.


March 14, 2008 3:56 PM

India is facing what I call "harmony" problem. "IT" alone cannot feed, educate, transport, house, govern etc people. The system if out of balance. I am a Indian myself living in US for last 10 years, and I have observed and generally speaking Indians oversell their skills and capabilities, which reflects on their resumes and their stock market. however, there are some well known and very shining stars from IITs, IIMs and other elite institutions who have rocked and made significant contribution. Unfortunately, Standing behind the shadow of these stars are too many duds.


March 14, 2008 5:27 PM

Rains have clearly been the issue as far as Indian agriculture is concerned. A lot of the pests that exist on crops do get washed away by rain and there is a whole set of variables that rain prevents. Seeds has been another issue. Quality seeds have always been a concern and most farmers use part of their produce as seeds for the next crop as they cannot afford new ones.


March 14, 2008 9:53 PM

India has moved on to the next big thing. It started off with IT services but it kicked off other axillary sectors of the economy. Real estate, finance and Infrastructure are the next big sectors. Most of these new services are for internal consumers.

So India story is just getting started, it is probably where US was in 1910. So expect rapid growth, maybe a depression and uneven years of boom and bust.

But it is a long term bull story. Invest on dips and hang on for the ride!


March 14, 2008 11:21 PM

The biggest problem is that government had taken growth for granted, as pointed out by Manjeet they failed to do carry out reforms. Government has been populist and coalition with Left has not helped the economy. The populist measures might hurt the growth both in longer and shorter term.

Hopefully after the next election we will get a government ready to carry out reforms in labor laws, insurance and most importantly agriculture.


March 14, 2008 11:44 PM

Steven's comments about agriculture is noteworthy. Fact of the matter is most of Indian farmers hold small piece of land for they being economical and their holding will only get smaller as the children divide up their parents' land holdings. Major part of India's agricultural production is wasted due to lack of efficient supply chain, cold storage or food processing industry. Availability of water, fertilizer and a market driven pricing coupled with elimination of middle men will go a long way towards providing a decent living for Indian farmers rather than election season gimmicks like one time agricultural loan waver as announced recently without any accompanying long-term plan that would only make a bad situation worse in the long run.

Service industry at best can play a supporting role but only mass employment industry and an efficient agriculture system can alleviate the abject poverty that is still widespread despite the recent rise of Indian billionaires.


March 15, 2008 3:59 AM

I am 60 yrs old. I had traveled allover the world and I had watched many events. I am Indian equivalent of babyboomers of the US and the western democracies. The best thing that happened so far is that we are wedded to democracy. We have so many ills including inefficiency and corruption. Despite all the negatives, India survived becausee of democracy and the will of people prevails. The worst offenders are the bureaucrats, not politicians, as many tend to think. Agriculture and Manufacturing are the most neglected in India, in that order. Farmers are exploited to the core, most of the farmers being ignorant and small (holding of land). It is a deadly brew for agriculture. Even the prices are fixed by the government for main produces of rice, wheat and sugarcane!!! Despite food sufficiency and green revolution, hardly any meaningful and/or consistant research or investment is made in agriculture. Poverty is mainly due to this factor, where farmers form the bulk of the population (read it as consumers). Except Punjab, Andhra and Haryana and parts of Maharashtra, most of the farmers live in poverty. Manufacturing is in doldrums because of skewed tax rates, vis-a-vis to world markets. The minimum tax rate is 30% or more (manufacturing tax, sales tax, entry tax, municipal tax etc etc)on manufactured goods. Hence quality is sacrificed to cut costs and wages are artificially kept minimum. Indirect and Direct Taxes on merchandise supports 50% plus of Federal Revenue and 80% plus on state revenues. Software changed everything and all equations are changing. Income and Corporate Tax rates came down from 70% plus to 33% in 1999. Now these two account for 45% plus!!! Similarly reduction in taxes (common Goods and Services to be implemented from 2011) may change manufacturing fortunes. It may perform better than IT sector in the coming years. Indians are also heavily investing on their children, particularly in science and technology proficiency. It will help India to catapult and outperform other countries before the end of the century. Hence India is on right path despite prevailing corruption and inefficiency, which will get reduced in the coming years. India is really catching up, but slowly. As it gathers momentum, India may gallup into the future. Future is bright for India, provided India nurtures and keeps democracy in tact.

Sandeep Khurana

March 15, 2008 8:14 AM

Some myopic, less informed, suffering people from US think that only IT is driving Indian economy. Well, what else you can expect from the community which preaches free trade and when the churning process starts and it challenges them to come out of their comfort zone, they start complaining. And come to the level of cheap talking, finger pointing and mud throwing.

Almost 1% of Indian population is dependent on IT in India. Even IT is concentrating itself to domestic market in India. Maybe if US starts protective measures than India also should start thinking of restrictions on US goods and services in India.
Indian economy is driven by
- Telecom (of which a US company has for billion USD project)
- Aviation(Boeing gets lots of orders from Indian companies)
- Insurance(has AIG,Prudential and many more)
- Banking(has citibank, ING, standard chartered etc)
- Manufacturing (GE and hundreds of many more US companies which are creating and selling from India and to India)
Like any other thing, a country's economy has its ups and downs and India is no different.

A Reader

March 15, 2008 10:45 AM

It seems like the whole world is just waiting for the Indian economy to slow down (including the author Manjeet).

Everybody has decided that if India's IT sector slows down then the whole economy will stutter. What the readers (and the author) needs to realize is that the greatest contribution of the the much famed Indian IT industry is not the fact that it generates USD 40 Billion in foreign exchange (or the 1.5 million direct + 6 million indirect jobs it has created), but the 'can-do' mindset it has created in the other industries in India. According to Anand Mahindra, organizations in every industry routinely say 'if the IT folks can do it, why can we?'. That's the contribution.

Now as far as economic growth is concerned, a good report to read is the one titled "World in 2050" by PriceWaterHouseCoopers released in March 2008. Check it out available for free download and see who tops the league table and why.

Deba Nanda

March 15, 2008 1:08 PM

Indian growth story is is no more sustainable largely due to policy flaws. The $150 billion loan waiver,highly publicised SEZ policy coupled with confusion on vital decisions are adequate slow the growth.The agriculture sector cannot move faster due to a loan waiver announcement.It is another sop for loan-misusing loanees.It can bring some votes but may not assure a stint for another five years.Had the money been spent on development of roads and irrigation facilitiesthe return would be wonderful.The Sez-mania is encouragingfeudalism under government support.The once successful IT/ITES is not likely to go for a bumper harvest even if there is a recession in the US. There will be a dearth of talent as there is no stress on quality control/enhancement.Maybe India has a great potential for growth but cofusion on policy cannot make it sustainable.PC-Manmohan-Ahluwalia cannot deliver when the Karat-Bardhan-Lalu-Mayawati-Karunanidhi-Pawar formatare there.


March 15, 2008 2:05 PM

Yes Gumberji has a point. I hope the western journalists mention more about India's endemic corruption.


March 15, 2008 11:18 PM

it is important for india to figure out how to overcome corruption , and fifth columnist who are doing chinas biding


March 16, 2008 1:31 AM

Unless new products & technology are innovated fast instead of concentrating on outsourcing and back-office jobs from the West, the growth cannot last. However as the India Educational system is pathetic and admissions are not based on merit but on politics, the strong foundation of high-quality Universites & Institutes as present in America, Europe, Japan is not available to produce quality scientists and researchers as the backbone for innovation of new technolgy & products indigenously.

Shantanu Chatterjee

March 16, 2008 4:57 AM

Its important to keep a very cool head in very challenging times pakistan is in chaos and may create problems if egged on by china,china facing double digit inflation may seek nationalism to seek internal unity with the rest of asia firmly under the US umbrella we may be the ones they may mess with,Russia is moving away from us cancelling MTA aircraft,tech transfer agreements,jacking up prices of military equipment etc and the US Is rudderless with bush in the white house and a bitterlyfought election amidst the biggest economic crises in 20 years.

So basically weather the storm for the next 2-3 years calmly till the picture clarifies and stop this India superpower 2020 nonsense.


March 16, 2008 11:49 AM

Indian economy continues to post impressive numbers for past few years despite few reforms in most of the sectors. It's time for Indian Government to give up on election politics and devise stratergies and reforms to keep growth on track which might be lost soon if not taken into account falling demand of goods and services from slowing US economy and increasing inflation in India.


March 16, 2008 2:22 PM

What India should do and why? who does not want to take a shot at that. my own two bits...
1. GM crops... India is already among the biggest beneficiary of this. Cotton grown has increased over 70% with no increase in hectareage. Boll worm that needed a cocktail pesticide spray every week is now a thing of past. More GM crops please but those that are relevant to Indian farmers. and in crops like rice, jowar, maize etc that are the staple of poor farmers.
2. grow jatropha. grows in lands that are unfit for other crops. can be used as a fence. needs no irrigation. no pesticides. produces bio-diesel. eats up bad CO2, prevents soil erosion. once planted yield oil bearing fruits for 40 years. generates jobs at the rural level that too for the most disadvantaged. . so may reduce rural folks shifting to urban areas looking for jobs. reduces need for imports of crude oil/ petroleum.
Only that these steps may not fetch votes like loan write off do!


March 16, 2008 2:30 PM

Someone here said that 1% of India is dependant on IT. Fact is that each IT job creates demand in other service sectors, real estate, retail trade and more.

Further every IT company creates huge opportunities for other services such as facilities management, security and so on. Slowdown in the IT sector will see a slowdown in employment in these sectors. There is some hope now that the Rupee has fallen.


March 17, 2008 8:04 AM

Go out of Bangalore, Chennai and Delhi cities and see the differences non-IT industries are making on people's lives. IT and its effect on other industries is not much and is limited to very few cities..still I would stick to 1% figure.

Amit Shah

March 17, 2008 8:12 AM

We all forget that India is a domestic consumption led growth story. the central bank of india has done a very good act of balancing inflation and growth together.but now things are changing..fears of inflation slipping from the comfort zone at the cost of growth. The major pressure on the indian markets has been due to lack of activity form FIIs (due to global reasons) but i see no other country except india and china giving them returns higher than inflation, so now or then, they have no choice but to come back. that was for the markets, but today, even at this rate of interest in india, the corporate profitability has been consistent. Well there are many other issues which have been discussed by my friends earlier, they will need time and POLITICS has been the biggest enemy of India as things tend to be election oriented. But we idians still believe in the trio of chidambaram(finance minister), Dr Manmohan Singh (prime minister) and Monteksingh Ahluwalia(planning commissioner) who were the same one to open doors of liberalization for india in 1991, india is in safe hands, and we believe the biggest growth story of the coming decade.

shirish kokatay

March 17, 2008 1:46 PM

The recent success of the Indian economy occured despite socialist tendency and biases of the successive Indian governments. Over the past eight to nine years the high value offered to western markets by IT industry and by Call center and other BPO service sectors pumped foreign exchange in to India, thereby jump starting the once moribund economy.

If the Indian government is not now able to muster the courage needed to shed all public ownership of productive assets, to lower taxes and more importantly cut red tape even further and lastly help the investment in infrastructure in a major way, then the Indian economy will go back to hobbling along as it had been in the past.

This will severely hurt - the poor, the most vulnerable, the dispossesed, the uneducated, the small farmers. For their sake I hope that the Indian government and ultimately the people of India embrace Conservative, fair and rational economic policy to ensure high growth rates.


March 17, 2008 2:45 PM

India has gone through many of phases of these kinds in its 5000 year history.
The economy will see through hard times this time as well.


March 19, 2008 6:37 AM

US slow down has both positive and negative effects on Indian IT industry. Some positive effects are - lower property prices, lower inflation,low attrition rate and much more down to earth employee expectations. The negative effects are fresh engineers would find it difficult to get jobs. With the highest number of young employable people in the world, if young people find it hard to get jobs it will depress their enthusiasm.
The real strength of India lies in the resilience of its people. They are self reliant and self contained. That is why when economic sanctions were imposed on India aftermath the Nuclear test, the western world was greately disappointed to learn that it hardly affected Indians. Indians have learnt the tricks of not depending on external help, including that of their own government, to survive.


March 24, 2008 1:19 PM

Wow - Manjeet, I can safely say that your story's been read by quite a few readers. Without commenting on any comment, all I can say is that Manjeet is right - The US downturn is having an effect on India.

Anyone who does not agree needs to do his or her homework. From the textile industry to IT, just about every sector is starting to feel the pain.

Its not just India - globally, every economy depends in some way or the other on the US; Japan's 'carry trade' is unwinding, Europe's companies are feeling the slack in demand, China's sweat is starting to trickle when it sees its dollar value of American debt dwindle by the day, the OPEC chaps are shedding tears.

So India's growth was dependant on the consumption and corresponding growth in the US and it may have brought accolades for India on the global business scenario, in places as diverse as Davos and Dakar. That, for a country which was never really taken seriously at one time, may be an achievement.

You can say what you want - ground reality is, when a hotel room that cost USD 160 in 2006 is pegged at 400 USD today, something's going seriously wrong in this country. India's vaunted per cent growth may bring prosperity to millions but it depends on what you call prosperity - a TV? A car? washing machine? Some other similiar stuff? But India's running its environment ragged and, sooner or later, this 'growth at any cost' is going to cost India very, very dearly. And its not too far in the future.

That will be a true test of the Indian economy and I pray and hope, that India will come out scarred but stronger.

Prasad Abhyankar

March 6, 2009 11:52 PM

I do agree that only IT will not make India No.1 Our School study says that India is a Agricultural country max. population depends on it why Govt. is not taking Agriculture seriously Report says we will face Scarcity of Grains due to which we have to Import Grains abd the Money will go in other countries.we have good quality Land but those lands are declaired as SEZ we need to learn Agriculture from Israi.when we spend uncountable money on election and cricket we need to put more money in agriculture but in the right hands so that it will reach at the bottom.

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