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Growth & Other Fears

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Hard days are coming. As the tide of economic growth ebbs all over the world — at 6.9 per cent — India finds its GDP growing at its weakest pace in more than two years. A heavy toll was taken by the stubbornly high inflation which prompted the RBI to hike interest rates a record 13 times in a row, crimping capital flow to industry. Plus a crisis-hit global capital market and a policy paralysis  made for a tough period for a country, which till a year back was a darling of the global investors.

Growth of eight infrastructure industries slowed down to 0.1 per cent in October this year, from 7.2 per cent expansion witnessed in the same month last year. Weakness in the July-September quarter (Q2) was broad-based, with manufacturing growing at only 2.7 per cent and mining contracting 2.9 per cent, reinforcing the view that the Reserve Bank of India (RBI) will have to stop its tightening policy. Inflation has been persistently high all year, policy inertia has hurt spending and industrial output and, now, capital outflows have pushed the rupee to new lows.

India which had become accustomed to near double-digit gross domestic product growth and talk of rivalry with China to be the fastest-growing big economy in the world, finds itself with chocked off borrowing and slowing growth, while inflation seems to be little subdued. The palpable evidence of slowing growth is likely to give the central bank the ammunition to pause rate hikes — much like the bigger and stronger competitor China has done on Wednesday. China's central bank cut the reserve requirement ratio for its commercial lenders on Wednesday for the first time in nearly three years to ease credit strains and shore up an economy running at its weakest pace since 2009.

The move comes amid increasing concern among policymakers worldwide that the global economy is on a slippery slope as the euro zone struggles to decisively tackle its two year debt crisis.

Downturn Foreseen
However, the growth downturn had hardly been unexpected. "It's more or less in line with our expectations, and we're expecting it to stay around this level of 7 per cent for the remaining quarters of this financial year," said Indranil Sengupta, an economist at the Bank of America-Merrill Lynch in Mumbai. Other than the falling growth in manufacturing sector, the India's services sector contracted at its fastest pace in over two years during October, knocked by a slump in global demand and tight monetary policy.

The partially convertible rupee hit a record low of 52.73 against the US dollar on Nov 22, as investors fled risky assets and its recent weakness is expected to spike India's import bill and in turn, push up prices. Indian exports in October slowed to just over 10 per cent from a high of 82 per cent in July, reflecting risks to growth coming from the euro zone beset with sovereign debt woes.

But economists continue to be optimistic about India's potential and see recovery just around the corner. Terming the 6.9 per cent economic growth in the second quarter as "lower than expectation", the Prime Minister's Economic Advisory Council expressed the hope that that good performance by farm sector would take annual growth for 2011-12 to 7.5 per cent. The poor performance of manufacturing sector and falling industrial production have led to lower growth," PMEAC Chairman C Rangarajan told a news agency.

He, however, exuded confidence that growth would be better in the next two quarters as did Finance Minister Pranab Mukherjee and Chief Economic Adviser Kaushik Basu. Basu in fact expects a rebound to take place by the last quarter enabling the economy to grow by 7.5 per cent in 2011-12 while Mukherjee expects the economy to grow 7.3 per cent in the fiscal  year ending March 2012. "Taking into account the trend of the last two quarters, I expect the GDP growth to be 7.3 per cent (in 2011/12)," he said. However, he conceded that hard days are ahead and said the present uncertainty with regard to global situation is creating concerns about FII and FDI flows. "We will continue to adjust our policies according to the developments," he said.

Basu on the other hand said, "There are three causes of this temporary slowdown in growth. They are slowdown in global it is in a gloomy global scenario that India's growth has slowed down...

We are battling inflation. There is no getting away from that... There is some slowdown in decision-making," he said.

Planning Commission's Montek Singh Ahluwalia  said investment in India should pick up in the second half of the fiscal year and help boost growth, which slowed to its weakest pace in more than two years in the September quarter.

Growth has been slowing across Asia owing to the slump in demand from stalling developed economies for the region's exports. India's slowdown has been domestically led and sharp,  estimates having fallen from expectations of a 9 per cent pace at the start of the year. China's economy slowed down to 9.1 per cent in the third quarter, from a 9.5 per cent in the second quarter, while the Organisation for Economic Cooperation and Development Bank cut its forecasts for the global economy to 3.4 per cent for 2012.

The global economic recovery is running out of steam, leaving the euro zone stuck in a mild recession and the United States at risk of following suit, the OECD said on Monday, sharply cutting its forecasts.

Impact On Market
Amid concerns over a slowdown in economic expansion, a research report has said that a fall in the growth rate to 7 per cent could drag the stock market benchmark Sensex to as low as 14,500 points by next fiscal.

The report by global financial services giant Deutsche Bank, however, asserted that the long-term growth prospects of the Indian economy remained intact and an average growth rate of 8 per cent was expected in the next two years.

But, factors like weakness in the investor expectations for the country's economic expansion and corporate earnings growth could nudge the investment community into a cautious posture.

Seeking to evaluate the impact of any slowdown in economic growth rate on the stock market,  Deutsche Bank said that a fall in GDP growth rate to 7 per cent in the next fiscal (FY2012-13) would result in a corresponding fair value range of 14,500-16000 for the BSE Sensex. Deutsche Bank said that India's position as one of the most rewarding market across the world in the past five years could see some value-erosion in the event of slower GDP growth and declining corporate earnings growth rates.

Deutsche Bank said that the risks were growing for a slowdown in the country's medium-term economic growth trajectory towards 7 per cent, due to concerns over policy uncertainties, conflicting demands and compulsions of a popular democracy and India Inc's growing despondency.

However, these risks would decline considerably if global commodity prices cool down and policy actions are undertaken for addressing supply-side bottlenecks in coal, preventing any runaway increase in fiscal deficit and there was an improvement in India Inc's business confidence and inclination to invest.