15 Oct 2008 4:27 PM

Impressive albeit lower growth expected in 2008-09 says CMIE

We have revised our real GDP growth forecast for 2008-09 from 9.4 per cent to 8.7 per cent.

Our downward revision comes at a time when the financial markets are in turmoil. However, our revision is not entirely because of the turmoil. The Indian equity markets fell the most in January 2008. Foreign institutional investors have repatriated USD 16.2 billion since February. Also, interest rates and inflation have been high for several months now. During this period of capital flight and tight liquidity, the Indian economy did quite well.

1. Real GDP grew by an impressive 7.9 per cent in the first quarter of 2008-09.

2. Exports grew by a robust 35 per cent in dollar terms till August in spite of global gloom.

3. Imports grew by 38 per cent in dollar terms till August partly because of high petroleum prices.

4. Non-oil imports grew by 28 per cent in dollar terms till August reflecting strong domestic industrial demand.

5. Direct tax collections grew by 33 per cent till September reflecting rising incomes and profits.

6. Bank credit was up by a robust 26 per cent as of 12 September.

7. Railway freight movement grew by 8.6 per cent till August.

8. Cargo on major ports grew by 8.4 per cent till August.

9. FDI inflows grew to USD 14.8 billion till August compared to USD 6.4 billion during the same period last year.

10. Corporate sector sales grew by 35 per cent in first quarter of 2008-09, rubbishing claims of an industrial growth slowdown.

11. New investment proposals continued to flow at the rate of Rs.5 lakh crore per quarter.

The only poor indicator is the Index of Industrial Production that grew by 4.9 per cent till August. But, we believe that the IIP is seriously impaired and therefore not a good indicator of the economy's health.

An important factor in favour of sustained growth is that the RBI has shifted its stance in favour of enhancing liquidity and SEBI has signaled greater freedom to overseas investors. The Ministry of Finance has also sought to build confidence.

The real economy is largely insulated from the financial turmoil we see in the equity markets. There is a liquidity crunch in the short term money markets. But, there is no serious credit squeeze for industry, yet. Given sufficient liquidity infusion, growth of the real economy is likely to remain robust. We believe that the economy would continue to grow at a healthy pace in the coming quarters. Our downward revision of the GDP forecast is in response to problems related essentially to the real-estate sector and some slowing down of implementation of investment projects.

The revision reflects some stress in the real-estate sector and a slowdown in the implementation of investment projects. Growth in capital formation has thus been scaled down from 18 per cent to 14 per cent and growth in the construction sector has been reduced from 15 to 10 per cent. Industrial sector, that was expected to grow by 9.1 per cent is now expected to grow by a lower 8.3 per cent. The most significant correction is in the steel and copper sectors.

We have been the most upbeat on the Indian economy this year because of the acceleration noticed in investments in recent years. In spite of the downward revision in our forecast, we continue to remain upbeat on the Indian economy.

Sonal Bhatia
bsonal@cmie.com