Column : Slow speed zone

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: The telltale signs of a slowing Indian economy are emerging. One good indicator is the weakening in commercial vehicle sales. Tata Motors suspended production at a couple of its plants and Ashok Leyland announced it will work its plant for only three days a week. All this is to cut inventories and match supply to demand. A leading financial daily also points to a sharp drop in shipping freight rates and to shipping companies contemplating sending their older fleet to the breaking yard.

The optimists still argue that 8% growth for India is achievable even now given the strengths of the domestic economy, that India’s duration of pain will be relatively short, and that the economy could bounce back strongly as early as in the next financial year. But the optimists could be missing the basic conditionality that had allowed India to register such sharp growths. Domestic consumption and investments both saw sharp rises, but investment demand was especially strong in the five-year period starting FY04. Gross fixed capital formation as a percentage of GDP was growing at 6.6% in FY03 but jumped to grow at 13.7% in FY04 and averaged 15.8% in the five-year period ending FY08. On the other hand, consumption expenditure growth averaged 6.7% in the same period.

The story of private consumption was largely based on the wealth effect that the stock market generated, which allowed for the confidence with which Indian consumers could open their purse strings. Low levels of interest rates helped. Prices of all asset classes rose, mainly in equity and real estate. There is now a reversal of this scenario. The sharp deterioration in the global economy and the consequent outflow of foreign funds have led to a significant erosion of the wealth effect. The generally sticky lending rates of the banking sector are on the downside, despite monetary easing.