India's GDP sinks

Posted by: Manjeet Krpalani on February 27, 2009

As expected, India’s GDP in the quarter ended December 2008 came in sharply lower - 5.3% compared to the 7.6% in the previous quarter. The Sensex dropped 153 points on the news, so far.

It’s been a terrible disappointment for both India and for international investors in emerging markets. Just two years ago, India was riding high at 9.7% GDP. It seemed like the newly revved up emerging market engine would never stop. Corporate India was raking in the profits at 30%, there were large scale capital expansion plans.

But the global downturn took its toll. Global liquidity dried up, and the foreign funds that were flooding into India’s enterprises through its stock markets, withdrew, beset by their own troubles at home.

India shot itself in the foot as well. The ruling Congress failed to implement the promised reforms on infrastructure and poverty alleviation programs. That meant that although Indian companies and entrepreneurs had done their part by starting new businesses and expanding, they were constrained by New Delhi not fulfilling its end of the bargain. Physical infrastructure has become a major bottleneck, so has social infrastructure - the lack of decent schools, employment and healthcare for the ordinary man.

Instead, New Delhi spent billions on rural employment programs and farmer debt-forgiveness schemes, none of which have been implemented with very much success. Nor have they provided the much needed boost for domestic demand.

According to a report released by Moody’s Economy.com, the “massive slowdown in growth during the final months of 2008 has now dismissed speculation that India is more resilient in this global turmoil because it is more domestically oriented.” Rahul Bajaj, chairman of Bajaj Auto, one of India’s top scooter and motorcycle makers, said on television just after the GDP numbers were released, that the only way India can emerge is to increase domestic demand. The Confederation of Indian Industry, the top business association, says speedy implementation of infrastructure projects and a drop in interest rates can get domestic consumption going again.

If wishes were horses. Everything depends on the government providing a modicum of the services it is responsible for. That is unlikely to happen any time soon. National elections are two months away and the ruling Congress party won’t start a large infrastructure spending program at the tail end of its term. Instead, it is promising to do so if voted into office again. That, of course, is too late.

Moody’s is not sanguine about India’s economic future. The rating agency predicts growth of under 5% for the first half of 2009. That means that India is back to its holding position, or “Hindu rate of growth” from 20 years ago. The big disappointment was the drop in agricultural growth - by 2.2%. Though India’s agriculture sector has not performed well over the past decade, it has been a steady plodder, growing at 2.7% quarter-on-quarter; no one expected agriculture to falter.

The news is not good for this youthful nation, where 75% of the population is below the age of 36, and 55% below the age of 25. Already, there are 14 million youth coming into the job market every year - and only 1 million of them get jobs in the organized sector, ie. jobs which provide a salary payslip. The rest stay underemployed - and now they will be restless as well.

It will be a while before things look up. “When global economic conditions begin to improve, India will then see a bottom,” says Sherman Chan, an economist and the author of the Moody’s report. When that will happen, is anybody’s guess.

Reader Comments

Steven

February 27, 2009 11:58 AM

No Surprise. All were expected. I never put any trust on "Indian promise".

2Bob

February 27, 2009 4:51 PM

One has to be very pessimistic about the future of India. Despite the talk of "India Shining" and a few headline grabbing successful Outsourcing companies the underlying trends are not good. Exploding population which successive Indian governments have failed to address, the potential for global warming to cripple the ability to feed its people etc. Probably the best thing that could happen would be for India to outsource its own government to China. Say what you like at least their government is facing up to China's problems and looking for measures to improve the lives of its people. Where is the same drive in India? And don't give me this drivel about largest democracy blah blah - hasn't done India much good to now.

don't count your chickens before they hatch

February 27, 2009 11:09 PM

Steven

February 28, 2009 2:41 AM

I remember that one too.

"As China's GDP growth rate dropped to 6.8% during the October-December quarter and is expected to go down further, the Indian government has become hyper-active to achieve at least a 6.5% growth in Q4 to register a win over China. "

That message sent out by Indian gov is still fresh and hot.

Tom

February 28, 2009 4:06 AM

India, Indians and "Indian promise" hehehehehehe... i can`t stop laughing hehehehe....

Fang Li

February 28, 2009 4:35 AM

As in the past, I said, I think it does not matter whether Indian or China no 1 or 2 in GDP. Indian and China has been cooperate peacefully and the trade has been exponential. It is a win win situation. By way, Indian and China are partner instead of rival.

MotherIndia

February 28, 2009 6:51 AM

By the way ,this article does not tell the whole picture of the Indian economy. There is so called underground economy or cash economy that is unaccounted in the Q4 growth. Counting this cash economy, the India growth for the Q4 is actually 9%, in this respect, yes, the India economy is the world fastest, and definitely faster than the China economy. China is just a dirt poor undemocratic country. How can the world put India and China in the same category? India, after all is in the same league with west and definitely has the world largest democracy. Furthermore, Indians is way richer than the Chinese than the American.

jcage

February 28, 2009 12:44 PM

Hi Fang Li

The Indian government has just put a banned on Chinese toys because of health concern due to high levels of lead but the India toy manufacturing has the same amount of lead so it was not done for health concern. It was trade barrier! A trade war on this economic situation will hurt both countries!

Jatin Luthia

February 28, 2009 5:04 PM

I agree with Fang. It is time for India and China to form a united front to alleviate from this crisis and it would be in US and Western Europe's interest to support this huge demand pool

rob

February 28, 2009 5:47 PM

At least India is a transparent nation where GDP growth etc are known. China is hiding millions of slave workers who are all starving, and Chinese GDP growth is probably negative by now. Of course we wont know about this, just as we didnt know the full ramifications of Mao's 'Great Leap Forward' for decades.

mgesh

March 1, 2009 10:50 AM

Back to Basics ,back to Gandhian Philosophy!

Following western pathway will be disatrous for the world based on GDP,Gas guzzlers for each family,Burn down the whole world withi a decade!

This is an oppurtunity to reflect on ourselves,we are not lazy nor accustomed to western lavish luxury,life will roll on irrespective AAA rated thiefs like Morgan and Stanley,Meryll Lynch and madoff's.

Aha

March 1, 2009 7:59 PM

5.2% is still very good if compared to 6.3% negative and 13% negative growth in US and Japan. Isn't it?

Neil

March 1, 2009 9:30 PM

Well 5.3% growth rate is very impressive...when US is predicting a decline of 6 percent and there is absolutely no hope of growth or recovery for Europe and Japan for quite some time...

Ninan

March 2, 2009 1:29 AM

The global recession is impacted all countries including India. India has gone thro many turbulent moments in his history-but india is always getting better although at a slower pace than most people would expect. For all those who dislike India and Indians, my advice is you better get used to it-- India along with China will eat your lunch in the years to come.

2Bob

March 2, 2009 2:55 AM

@Ninan, there is no doubt that many Indians are experiencing enormous increases in living standards, but the facts remain India's population could potentially double over the next 60 years while the basic ability of the country to feed itself is unlikely to cope. Just the effect of global warming on monsoon rains could be catastrophic. The lifeboat effect of a few H1 visas won't be enough to bail out the majority of Indians. Where's the govt. action to deal with these issues? Or does the fact that India is a democracy mean that the country must bluder headlong toward disaster?

Panda@war

March 2, 2009 6:19 AM

Rob and other China bashers,

Buy a ticket to China to take a look youeselves. If you can't afford a 2-way ticket, no problem because the "staving " people of China will probably buy you the return leg back home as charity. Despite of the artificially low dollar exchange rate which greatly undervalues Chinese earning per head, still we are on average at least twice richer than Indians even with official exchange rate.

Leave underground economy alone, will you? China's underground economy is probably larger than your official one, which is still outside the world top 10 even with the 2nd largest population!

India is more transparent? Isn't that hilarious? India is way more corrupted than China on world corruption index. 5.3% growth rate? You will be extreamely lucky to have annulized 5.3 % at the end of this year. Hahaha... Dragon rulez, along with panda!

RK

March 3, 2009 9:09 PM

wow! whats with the India China comparison? i am Indian who just visited China. China's exports from the industrial belt from Shenzen to almost Shanghai is more than the total exports of India. there is no comparison there.
I have to say, in contrast to some opinion on this board, China works with India on the energy front (see CLP) and other areas as well. irregular economic downturns do not necessarily define an economy. case in point - the US. any macro economist will tell you that if the US is in the dumps now, that only means it will get better soon. policy makers are not usually sitting around wondering what to do next. they usually always have a plan. mistakes will be corrected. if the US provides no support, the focus will shift elsewhere and i suspect China works with India since they share some common economic issues that can be worked out by collaborating.
The US snub is a shock (economic) but it is arrogance to think that alone will be India or China's undoing.

T

March 3, 2009 10:37 PM

Wow, MotherIndia, I wanna know exactly what you are smoking, snorting and/or shooting up. Economically China is at a higher echelon than India and they have are better organized to respond to economic problems. If you don't believe me, check out any GDP and trade statistic available comparing the two countries. India has the potential to reach the number China currently has, but we remain at least a decade away from that. Only politically can India be considered India "in the same league with west" and only because India is a democracy. The siege of Bombay showed Central govt. remains woefully disorganized. Population control has gone nowhere and that puts additional pressure precious natural resources. Infrastructure is woefully inadequate to meet current needs, how exactly is it going to meet the needs of trade when and if India gets to the same trade numbers as China? We have too many roadblocks to economic progress. Look at Tata, they have a brilliant idea with Indica, but have to start from scratch because a bunch Commies in Bengal decided block Tata's plant. The list of issues is waaaay too long to be put here. I understand having pride in what has been achieved thus far is one thing, but bashing China is just plain stupid. Matching China's growth rate as a percentage shouldn't call for rah rah. Their 6.5% equates to a much larger change in GDP than India's because they have a larger GDP to begin with.
All your rah-rah-ing does is bring upon more Indian bashing and evokes xenophobia amongst others. It is better to keep your head down and progress along until reaching the milestone of plateaued population growth and becoming trade superpower. We have reached neither. Oh and need I remind that not only are Chinese an economic superpower, but are well on their way to becoming a military superpower as well. Need I remind you of 1962??? Btw I an an expatriate Indian residing in USA. India's moral upper hand against China will always be democracy. China is not capable of becoming a democracy because it doesn't benefit the "Party". The people of China on the other hand, if given the chance, would pounce on it.

LC

March 8, 2009 4:36 AM

I am Chinese but I have to say that Chinese don't take sarcasm/irony very well...

JiaMing

March 9, 2009 2:45 PM

I don't know why there is so much hostility between Chinese and Indians. As a Chinese, I am rooting for India to grow and succeed along side China. The two neighboring countries had one little war that lasted a few days over a history of 5000 years. I'd say that's pretty amazing. It's the ego from both sides that is feeding this completely unjustified hostility. But then again, this is human nature we are talking about. Our species fought for pride and the ego as long as we exist.

TUNGUTURI SRINIVAS

March 26, 2009 6:57 AM

SEE this sort of unhygenic competition should not be there between the two friendly nations.

YangYiChen

March 27, 2009 10:48 PM

Talking about promises,The Government should be blamed about it,India's CPI can be much worse in future .To recover deficit at excess rate in economic ,it can possible at low chance...what a pain......

Yang Yi Chen

March 27, 2009 11:09 PM

I tell you what ,each country just reflect and comparing their own weakness,instead of uniting their abundance.This is ASIA! We need to compete with the west!although this is the only optimistic way to decribe it ,but say in pessimistic way how can the largest population of the world(China) will conquer the economy power and make it balance ?Talking about Uniting Power,We need Action !

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Bloomberg Businessweek’s team of Asia reporters brings you the latest insights on business, politics, technology and culture from some of the world’s biggest and fastest-growing economies.

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