Economic Futures: Financial Express, 6th January 2009

The year gone by was a difficult one for all economists and policy makers. Everything that could go wrong went wrong, and existing shibboleths of capitalism were shattered and the concept of governments became more relevant. Terms like governance, moral hazard and inefficiency dominated our jargon as the financial crisis revealed more victims than an earthquake. Internally too, we transcended from irrational optimism (remember the double digit growth we bragged about) to a cautious 7% growth rate and stood helpless as inflation soared and the desperate monetary measures turned out to be impotent. Industry is down and so is the service sector, and with the rupee falling and foreign reserves declining, the story, though not too bad, is not one for the pulpits. What lies ahead?
2009 has to be better than 2008 for India as we have actually been through a low from where things can only get better. While agriculture will be directed by the weather conditions, the global slowdown will have an impact on our exports, and hence industrial growth. The absence of wide-scale loss of jobs will help in maintaining demand and moderate industrial growth in the range of 7-8% looks possible on a lower base. The government will have a tough time reining in the fiscal deficit, which has gone awry due to lower growth and higher expenditure. The fiscal stimulus programme coupled with Pay Commission payments and oil subsidies and loan waivers will actually call for a FRBM holiday in the face of an election. RBI also would per force be looking at further easing the credit reserve ratio and interest rates to prop up the economy and we could be looking at lending rates moving towards the 10% mark.
The capital market, which has been providing a booster shot for consumption especially in the areas of housing and high living, would be subdued given the high dependence on the foreign investment flows, which are unlikely to be too buoyant in the first half of the year. But, given that the worst is over, a recovery could be expected in the second half of the year, as the lower rates of the Fed, ECB and BOE take effect. This also means that investment opportunities would be limited and banks, insurance and government papers would continue to be attractive.
Inflation should be less of a concern though an upward pressure can be expected towards the second half, as the world economy recovers and the price of oil starts inching northwards. A number of 5% on an average should be okay enough to provide a stimulus for industry without hurting the consumer too harshly. Moderate inflation and stable global prices would also mean normal conditions in the commodity markets, which have in the past swayed in accordance with the growth prospects of the world economy (especially China) and agricultural production (remember the diversion of land to growing soybean and corn away from wheat for production of bio-fuels).
The year may not be too bright for the external sector and the surpluses which were seen in 2007 are unlikely to be replicated as there would be fewer inflows through FII funds even as the pressure on current account deficit should ease as the oil import bill declines due to lower prices. The rupee would tend to depreciate rather than appreciate on a mid-term basis (good news for the currency futures markets).
Globally too, the focus of growth will shift back to the developed nations. Developing countries’ fortunes would get coupled again as the China boom phase would have gotten moderated. The new US President would show the way and as the growth path meanders upwards towards the third quarter of the year, it would mean good news for us too in this continent.