Growth revival imminent

Growth revival imminent
The Economic Times, June 24, 2009, Page 14

World Bank Estimates Unduly Pessimistic

THE World Bank has cut its global growth forecast for 2009. It has said the world GDP will shrink by nearly 3% as against 1.7% it had forecast in March. For India, however, the Bank has raised the growth estimate from 4% in March to 5.1% in 2009-10. We believe the Bank is being unduly pessimistic about the prospects for growth in India. There is enough evidence to suggest India’s GDP should easily expand by 7% in 2009-10. The quick estimates of GDP released recently by the Central Statistical Organisation (CSO) show how domestic investment and consumption levels are much better than what one might have projected after the global financial meltdown last year. For one, Gross Fixed Capital Formation (GFCF) at current prices held up quite impressively in the first quarter of 2009 at 34.8% of GDP compared with 33.4% in 2008 first quarter. Indeed, this indicates the domestic investment rate is holding up in spite of a full year of recession in the developed world. Pessimists had argued the investment rate could decline dramatically after the global meltdown. However, there are signs that capital flows are easing of late. About $25 billion of equity funds have come into the emerging markets this year. For India, with an investment rate of 34%, one can safely project a GDP growth of 7-8%.

Again, after the 2008 meltdown, it was assumed the Indian consumer would withdraw into a shell largely due to the fear factor caused by the severity of the recession. For a while, this seemed very plausible. However, now there are signs of a consumption revival, as reinforced by data from consumer goods manufacturers. The CSO data also reveals that Private Final Consumption Expenditure has grown to 53.8% of GDP in January-March 2009 compared with 50.4% of GDP in the first quarter of 2008. Similarly, the Government Final Consumption Expenditure has also risen from 12% of GDP in first quarter 2008 to 14% of GDP in January-March 2009. This is partly the result of the big fiscal stimulus — up to 4% of GDP — over the past eight months. Unlike in the OECD region, there is no demand recession in India. A GDP growth of 7-8% is there for the asking, with some good policies in place.