How bad is the slowdown?

It will be tough for investors and businessmen to commit money to buy shares or fund new projects till there is more clarity on the extent of the slowdown and how long it will last

The Indian economy seems headed for its slowest growth rate in five years. But what should worry investors and businessmen even more is the pace at which growth forecasts have been slashed in recent weeks.

It will be tough for investors and businessmen to commit money to buy shares or fund new projects till there is more clarity on the extent of the slowdown and how long it will last. Even the most inveterate risk takers now have reason to pause and wonder.

Their timidity is likely to further harm economic growth, as every deferred investment and every postponed project further pulls down effective demand.
There are few trustworthy clues right now on the extent of the damage. Economists and policymakers across the world have been caught on the wrong foot over the past few months, as the worldwide economic slowdown has been far worse than they expected.

India is no exception, as growth forecasts are revised downwards in a hurry. The script goes something like this: “The Indian economy will surely grow at more than 8% this year; no, make that less than 8%; uh, 7% actually.”

Chairman of the Prime Minister’s economic advisory council Suresh Tendulkar said last week that he expects the economy to expand by 7% this year. The economists who advise Manmohan Singh had earlier estimated in August that the rate of economic growth would be around 7.7%. The Reserve Bank of India had said at the end of October that the economy will grow at between 7.5% and 8% this year.

Next year could be even worse. The International Monetary Fund (IMF) dramatically cut its growth forecast for Indian economic growth during calendar year 2009. The multilateral lender had said at the end of September that the Indian economy would expand 6.9% in 2009; around five weeks later it has shaved 0.6 percentage points off that forecast. IMF now believes the economy will grow 6.3% in calendar 2009.

These are unusual times and economic growth may slip further in the quarters ahead. That is cause for worry rather than panic. Mint has been of the view that India can sustain a growth rate of around 8% in the long term, given India’s savings rate.

There will be years when we grow faster, and years when we grow slower than this sustainable rate. We see no reason even now to doubt the long-term India growth story.

Source: Livemint