The Prime Minister, Finance Minister and many other economists have predicted 9% economic growth for the fiscal year 2008-09. However, there are clearly some risks on the horizon that must not be ignored. Admittedly, the surprises of late have mostly been on the upside. Since 2003, India has averaged an astonishingly rapid GDP growth of 8-9% per year. However, India now faces a 50% chance of a painful downturn in 2008-09, a 30% chance of a mild slowdown, and only a 20% chance of maintaining its 9% economic clip. The global economy?s relevance may have receded, but the Indian economy cannot hope to escape its effects beyond a point.
India?s economic acceleration since 2003 owes much to the global boom, a tide that has lifted most of the countries, including India and China. If the global tide ebbs in 2008, which is likely, India will go down along with others, though it may prove more resilient than other countries.
The global oil market continues to tighten, with stocks in major OECD countries including the US, Europe and Japan, showing deterioration. In the US, crude oil stocks have continued to widen their gap to their five-year average and are now some 30 million barrels below last year?s level. Global oil balances are likely to undergo further tightening in 2008. The constructive picture for the year suggests that annual average of oil prices will rise again for the seventh year in succession. From the 2007 average, prices of WTI and Brent are likely to rise by $13-15 a barrel in the current year. Demand growth prospects may have turned somewhat uncertain due to deteriorating macroeconomic conditions. However, there exist severe supply-side constraints which could force prices to move up. The potential of supply growth from non-Opec regions is rather limited?primarily due to a quicker decline of production from ageing oil fields.
Analysts have listed many reasons to be downbeat?the global housing slump, credit crunch arising from the subprime crisis in the US, record oil and food prices, and a likely cutback in US consumer spending. High food and fuel prices have a big impact on inflation in developing countries like China and India, where central banks will keep interest rates high to control prices. This will hit industry.
Credit card defaults are rising in the US, a logical corollary of the mortgage defaults. Even household consumption is influenced by the ?wealth effect?. When housing prices boom, home-owners feel wealthier and so often spend more than their annual income. But when real estate prices fall, as is the case today, owners feel poorer, and slash spending. US spending has kept the world economy booming for five years, and reduced US spending could mean a global downturn.
However, stock markets the world over are brimming with optimism, and stock prices are at record highs in India and China. Rising productivity has enabled the world to grow at the fastest rate in history with only moderate inflation. Optimists expect this rosy story to continue, with inflation no longer a worry. Central banks in the US and Europe are pouring billions into the banking system to avoid a credit crunch. The housing slump in the US has so far not deterred consumer spending. Some slowdown may indeed take place, but optimists expect that the US will have a soft landing?to 1% GDP growth?without an outright recession. Moreover, this muted slowdown will reduce commodity prices and help tame inflation.
Further, many optimists now think that emerging markets have ?decoupled? from the US economy, and their growth is no longer critically dependent on rising exports to the US. If so, a recession in the US will have little impact on emerging markets. All this, frankly, is wishful thinking.
Sure, emerging markets are much less dependent than before on the US economy. Yet, the decoupling is partial at best. A US recession will mean less US imports from Asian manufacturers like China and India, which will then import fewer components from Japan and Korea, and fewer raw materials from Africa and Latin America. Thus, there will be downward multiplier effects globally. An American recession would reduce India?s GDP growth rate from the current 9% to 7%, or even a bit less.
Remember the 1988-90 recession? It hurt. You may also recall that in 1997, the Pay Commission award exacerbated the Asian financial crisis impact. Another Pay Commission award is due in 2008, again on the heels of a possible global downturn, as part of the electoral cycle.
Optimists are correct that Indian industry and banks are much stronger today, and better able to withstand oil shocks and the like. However, Indian fuel prices simply have to be increased to cover the oil pool deficit, which will result in rising food prices, causing serious inflationary pressures. For all these reasons, India?s GDP growth for 2008 is unlikely to get close to 9%.
The author is trade professor at Icfai Business School, Chandigarh.
These are his personal views.
E-mail: vasu022@gmail.com