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.