Byapaar.com – The Indian Business Blog

It was supped to happen!

When economies around the world were either in recession or contraction, Indian government has been projecting a GDP growth of more than 7% for the fiscal of 2008-09 which many economists and analysts termed as over optimistic. With falling demands in major markets around the world, the only way to keep a high growth rate is to create more demands in the domestic market and Indian government has been trying it through three-staged stimulus package by reducing interest rates and releasing huge flow of funds in the market.

It seems the packages were not timed well as third quarter (ending on 31st December from 1st October) GDP growth fell to 5.30% – thus falling below 6% for the first time since 2003. What is more worrying is the fact that farm sector contracted up to 2.20% and manufacturing sector fell 0.2% from the level during same time last year.

As a result of this, stock market fell by 0.7% during the day and Indian Rupees breached the record Rs. 51 barrier against the Greenback amidst sustained pressure for the dollar by foreign banks and oil importers.

With the announcement of this economic performance, eperts are having varied opinions. Some economist like Sherman Chan of Moodys believe that the governments projection of over 7% growth is over optimistic and it is high time the projection is revised. On the other hand, Pawan Kumar Bansal, the junior Finance Minister says the government still expects GDP to grow at over 7% during current fiscal. This group is of the opnion that the stimulus measures are yet to have major effects and the economy will recover during the 4th Quarter.

whatever happens, Industry is of the opnion of more rate cuts by the Central Bank as they need more liquidity in the market to take full advantage of stimulus packages announced by the government recently. This has necessitated more with this announcement of poor performance by the economy. Most believe that, if the economic growth slips below 6%, there will be huge job losses and India need to maintain a GDP growth rate of 8-9% in order to dent against the huge percentage of its people living below poverty line.

Indian Rupees slipped below the psychological mark of Rs. 50 against the US dollar on Wednesday as it came under heavy pressure from investors and oil companies in a market where the greenback has been scarce for the whole year. The global financial turmoil and imminent recession in industrialized countries have made foreign investors wary of the market and now they have started to withdraw funds from Indian equity

market. According to latest data available, foreign traders have already taken away US $13 billion from Indian market whereas by this time last year, they have pumped in US $17 billion. The pressure on the Rupee increased manifold over last couple of days due to high demand by oil companies who are scheduled to pay import bills at this time of the year. These factors made the Rupee very weak as there is very little supply of the greenback in the forex market. Market analysts and forex traders are speculating that it might slip further and cross Rs. 52 per US dollar mark during next few weeks.

On the other hand the Indian government continues to put up a brave face and is trying its best to ward off serious damages to the economy despite projections of lower growth rate. In its latest report the Center for Monitoring Indian Economy (CMIE) has put the rate of growth at 8% this year. But other agencies put the figure between 6.5 to 7 percent. Indian Finance Minister P Chidambaram said the government is taking more measures in the right direction and asked industries and service providers to cut prices during his speech at the concluding day of Indian Economic Forum, recently held at Delhi. He said -

“The classic response to demand slowdown is to cut prices for the short term ..”

According to him, price cuts will fuel domestic demand and improve sales thereby making balance sheets healthy. He told industry leaders that while banks are ready to lend money, consumers are nervous and are not ready to pay the current price. But CEOs are not impressed by government’s suggestion. They think that the interest rate must fall further before they can think of price cuts .

On another note, the government has announced some protectionist measure to shield local industries. It has re-imposed import duties on certain products including steel and soybean oil. It is also considering of lowering excise duties to give some relief to the industry.

Everybody knows Indian infrastructure is in tatters and government has taken this sector as its vehicle to pump in more money in the market. It is planning to double the stimulus package to US $10.75 billion and wants to work with the private sector very closely in this regard. (continue reading…)