India's GDP growth to dip sharply to 5.6%: Economist Intelligence Unit

• China too appears to be heading for a sharp slowdown with economic growth expected to fall to 6% in 2009, which would be the slowest rate of growth since 1990.
• In 2009, 29 countries—mostly developed markets, but also some major emerging markets—will experience economic contractions.
• India’s monetary policy will be eased even further in 2009 with two rate cuts of 25 basis points each in the repo rate in the first half of 2009.
• As developed-world interest rates trend towards zero, emerging markets like India will remain attractive.

The global economic meltdown—along with a domestic credit squeeze and falling demand—is having an increasingly severe impact on India's economy. While the government expects India’s real economy to grow at 7%, the Economist Intelligence Unit, the global business intelligence arm of The Economist does not share the government’s optimism.

Global deleveraging and moves to reduce risk exposure will hit India hard, especially in terms of the availability of financing for investment and consumption, and the slump in world trade growth will feed through even to India’s domestically oriented economy. The economic slowdown was initially restricted to the industrial sector, but recent data show that it is spreading to services as the squeeze on costs becomes more pervasive and demand slackens.

“We expect India’s GDP to grow by only 5.6% in 2008-09, compared to 9% last year. India is not alone, China too appears to be heading for a sharp slowdown with economic growth expected to fall to 6% in 2009, which would be the slowest rate of growth since 1990. In 2009, 29 countries—mostly developed markets, but also some major emerging markets—will experience economic contractions,” said Manoj Vohra, India Director (Research), Economist Intelligence Unit.

According to the Economist Intelligence Unit, global economic growth, at market rates, is forecast to contract by 0.9% in 2009, by far the worst performance since the end of the Second World War. The economies of the US, the EU, the UK and Japan will all contract in 2009. As a result, global trade is set to contract by 1.5% in 2009.

“Emerging markets have had a good run in recent years on the back of buoyant world trade growth and abundant global liquidity, which in turn drove strong domestic demand expansion. However, the environment changed dramatically in the second half of 2008 and will deteriorate further in 2009,” said Vohra.

The Economist Intelligence Unit expects that the monetary policy will be eased even further in 2009 and forecasts two rate cuts of 25 basis points each in the repo rate in the first half of 2009, bringing the rate down to 6%. However, the RBI will be reluctant to go any lower than this, as India will remain vulnerable to inflationary pressures arising from currency depreciation and wage growth. On the fiscal front, India’s budget deficit and external deficit put the government in a weak position to implement supplementary fiscal measures. “We estimate the budget deficit to average 4.2% of GDP over 2008-09 and 2009-10,” Vohra added.

Yet all is not doom and gloom for India's economy. India remains one of the world's fastest-growing major economies, with a large domestic consumption base, a still-strong financial sector and many sound, well-managed companies. The country's relatively low dependence on exports limits its direct exposure to the global slowdown, while cheaper oil prices are helping to narrow the current-account deficit. Lower inflation is driving interest rates downwards and the recent slew of policy measures should begin to take effect in coming months. As developed-world interest rates trend towards zero, emerging markets like India will remain attractive.