Business Standard

'Growth will not be below 8% in worst-case scenario'

GROWING RECESSION TO HIT INDIA`S RISING GROWTH

Vandana Gombar  |  New Delhi 

Centre for Monitoring Indian Economy (CMIE), a think-tank which collects and analyses grassroot economic data from companies and households, currently stands out as the agency with the most bullish estimates of the growth of the economy.

While most estimates of India’s GDP growth this year are in the 7-7.5 per cent range, CMIE expects the economy to trot along at 8.7 per cent. Even in a worst-case scenario, the growth is unlikely to dip below 8 per cent, Mahesh Vyas, CMIE’s managing director and CEO, tells VANDANA GOMBAR. Excerpts:

CMIE has the most optimistic estimate of GDP growth – at 8.7 per cent. With demand backing down over the last few weeks, isn’t there a case for a downward revision?

We review our forecasts regularly. These are presented in the Monthly Review of the Indian Economy. It is likely that our projection may have to come down further because of the current liquidity problems. But we do not see a demand problem. Our projection of 7 per cent increase in private final consumption expenditure is quite conservative.

What is this bullishness riding on?
Our forecast of 8.7 per cent real GDP growth can be broken down as follows: Agriculture 3.2 per cent, industry 8.7 per cent and services 10.4 per cent. On the demand side is private final consumption expenditure growth of 7 per cent and investment demand of 14.3 per cent. There is no stopping the investment boom in infrastructure.

The biggest sector attracting investment currently is electricity, where there is no lack of demand. Projects that are well into implementation will not be put on hold. But progress on those that are in the planning stage will slow down for some time till we overcome the liquidity problems and the uncertainties arising from them. I suspect this will not take too long and will not affect the overall investment boom.

“Investment boom” seems anachronistic at a time companies are cutting down work-weeks (like Ashok Leyland) and some are laying off workers (like Jet) as they struggle to manage liquidity and depressed demand. It does not seem to be a short term problem.
There is no denying that the business environment is stressed. We revised our forecast from 9.4 per cent to 8.7 per cent in response to this extraordinary situation. But it does not mean that all investment plans are on hold.

The impact of the current problem on investments is smaller than, for instance, the problem of land acquisition. Look at the Posco project or any other large greenfield project to see how enterprise grapples with a much larger problem. In comparison, the current liquidity-related problem is small and its impact on investments will be minuscule.

What about demand? Won’t projects be affected by lack of demand?
Demand is not a problem. The 30-32 per cent increase in sales of companies in the first half of the current year is a clear indication of this. This handsome growth in demand is for good reason: Tax-payers got a huge relief in the last Union Budget, government employees have benefited from the Sixth Pay Commission, farm income is up because this will be the fourth consecutive year of increase in income (a phenomenon that has not been seen in 39 years), the NREG (rural job scheme) has increased employment in the interiors.

All these are extraordinary phenomena in 2008-09. Besides, we have seen a steady rise in employment and wages over the past four years. This growth in demand is therefore very robust. I expect the growth seen in the first half to be maintained in the second half of the year.

So companies are telling you that they are not reviewing plans in the current situation?
We track over 20,000 companies and individual investment projects announced or being implemented by these companies, by government and by other agencies. We track all public announcements and contact these agencies to assess the progress in implementation. All companies are contacted at least once in six months although most companies are contacted every three months.

This is a mammoth ongoing bottoms-up effort to understand what is happening at the ground level. It is from this effort that we deduce that the projects that are well into implementation are not affected by the current liquidity-related problems. But, because of the uncertainties, many new projects are being put on hold. This does not hurt the current year’s growth prospect although it does vitiate the sentiment.

Since overall sentiment has turned negative, what is the growth you expect in a worst-case scenario?
In the worst case scenario, growth could dip to 8 per cent this year. And what about 2009-10? IMF has projected 6.3 per cent…? We are still crunching the data for 2009-10.

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'Growth will not be below 8% in worst-case scenario'

GROWING RECESSION TO HIT INDIA`S RISING GROWTH

Centre for Monitoring Indian Economy (CMIE), a think-tank which collects and analyses grassroot economic data from companies and households, currently stands out as the agency with the most bullish

Centre for Monitoring Indian Economy (CMIE), a think-tank which collects and analyses grassroot economic data from companies and households, currently stands out as the agency with the most bullish estimates of the growth of the economy.

While most estimates of India’s GDP growth this year are in the 7-7.5 per cent range, CMIE expects the economy to trot along at 8.7 per cent. Even in a worst-case scenario, the growth is unlikely to dip below 8 per cent, Mahesh Vyas, CMIE’s managing director and CEO, tells VANDANA GOMBAR. Excerpts:

CMIE has the most optimistic estimate of GDP growth – at 8.7 per cent. With demand backing down over the last few weeks, isn’t there a case for a downward revision?

We review our forecasts regularly. These are presented in the Monthly Review of the Indian Economy. It is likely that our projection may have to come down further because of the current liquidity problems. But we do not see a demand problem. Our projection of 7 per cent increase in private final consumption expenditure is quite conservative.

What is this bullishness riding on?
Our forecast of 8.7 per cent real GDP growth can be broken down as follows: Agriculture 3.2 per cent, industry 8.7 per cent and services 10.4 per cent. On the demand side is private final consumption expenditure growth of 7 per cent and investment demand of 14.3 per cent. There is no stopping the investment boom in infrastructure.

The biggest sector attracting investment currently is electricity, where there is no lack of demand. Projects that are well into implementation will not be put on hold. But progress on those that are in the planning stage will slow down for some time till we overcome the liquidity problems and the uncertainties arising from them. I suspect this will not take too long and will not affect the overall investment boom.

“Investment boom” seems anachronistic at a time companies are cutting down work-weeks (like Ashok Leyland) and some are laying off workers (like Jet) as they struggle to manage liquidity and depressed demand. It does not seem to be a short term problem.
There is no denying that the business environment is stressed. We revised our forecast from 9.4 per cent to 8.7 per cent in response to this extraordinary situation. But it does not mean that all investment plans are on hold.

The impact of the current problem on investments is smaller than, for instance, the problem of land acquisition. Look at the Posco project or any other large greenfield project to see how enterprise grapples with a much larger problem. In comparison, the current liquidity-related problem is small and its impact on investments will be minuscule.

What about demand? Won’t projects be affected by lack of demand?
Demand is not a problem. The 30-32 per cent increase in sales of companies in the first half of the current year is a clear indication of this. This handsome growth in demand is for good reason: Tax-payers got a huge relief in the last Union Budget, government employees have benefited from the Sixth Pay Commission, farm income is up because this will be the fourth consecutive year of increase in income (a phenomenon that has not been seen in 39 years), the NREG (rural job scheme) has increased employment in the interiors.

All these are extraordinary phenomena in 2008-09. Besides, we have seen a steady rise in employment and wages over the past four years. This growth in demand is therefore very robust. I expect the growth seen in the first half to be maintained in the second half of the year.

So companies are telling you that they are not reviewing plans in the current situation?
We track over 20,000 companies and individual investment projects announced or being implemented by these companies, by government and by other agencies. We track all public announcements and contact these agencies to assess the progress in implementation. All companies are contacted at least once in six months although most companies are contacted every three months.

This is a mammoth ongoing bottoms-up effort to understand what is happening at the ground level. It is from this effort that we deduce that the projects that are well into implementation are not affected by the current liquidity-related problems. But, because of the uncertainties, many new projects are being put on hold. This does not hurt the current year’s growth prospect although it does vitiate the sentiment.

Since overall sentiment has turned negative, what is the growth you expect in a worst-case scenario?
In the worst case scenario, growth could dip to 8 per cent this year. And what about 2009-10? IMF has projected 6.3 per cent…? We are still crunching the data for 2009-10.

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