The outlook for 2009

If there are no further shocks, confidence should improve by year end

There is a clear pattern to the forecasts being made about growth. Economists associated with the government continue to put the current year’s growth figure at around 7 per cent, and posit a recovery in the second half or last quarter of 2009. The first break in this broad consensus has come with the Prime Minister saying on Saturday that growth in 2009-10 could fall below 7 per cent. Private forecasters have tended to be more gloomy; barring some optimistic exceptions, the forecasts fall in a broad range of 4-6 per cent. It is important to understand who is right, because there is a psychological gap between 6 per cent (the rough average of the 1980s and 1990s) and 7 per cent (the average of the last decade).

 

Government forecasters have been slow to adjust to the slowdown. At Budget time last year, the finance minister was not ruling out 9 per cent growth for 2008-09. The RBI a few months later was talking of 8 per cent to 8.5 per cent. In September, the Prime Minister’s economic advisory council forecast 7.7 per cent. Even now the lowest quasi-official number is 7 per cent. To the extent that these assessments have been behind the curve, it would be logical to put some discount factor on official expectations.

On the other hand, are some private forecasters being excessively gloomy when they talk of the possibility of 4 per cent growth? A simple way to assess the position would be to start with India’s sustainable growth rate—which many people argue is not the 8.8 per cent average of the last five boom years, but the 7 per cent average of the last decade. Then factor in two current realities (the poor global economic situation through much of 2009, and the downturn caused by domestic factors), and it would be logical to expect economic growth this coming financial year to be significantly less than the “norm” of 7 per cent. It could be 6 per cent or less—which is where many of the private forecasters are.

On the more positive side, the stock market is about 30 per cent above its low point of 2008; and the drop in the market volatility index points to calmer price movements. Both carry the expectation that there will be no future shocks, and that the market has discounted the grim news expected over the next four weeks, as corporate numbers for the October-December quarter get announced. As for the major pluses and minuses, “falling off the cliff” would apply just now to auto industry sales and exports, but the biggest plus is the low oil prices, while the steps that the government and the Reserve Bank have taken since October to tackle the slowdown will begin to have some effect in the second half of 2009. Bank lending behaviour suggests that there is still a confidence issue in the credit market, and retail consumers seem to be holding back too. If there are no further shocks waiting round the corner, and if interest rates settle some more, confidence levels could rise by the end of the year—which is when one should expect the recovery to happen.