Economy heading for worst growth in 3 years

India is heading for its worst growth since the credit crisis of 2008-09, according to Chetan Ahya, managing director and Asia-Pacific economist of Morgan Stanley, the world’s No 2 investment bank.

Reason? Over the last 3-4 months, there are clear signs of a slowdown in car sales, two-wheeler sales and modern format retail sales, while investment and construction spending appear to be moderating due to lack of demand visibility and policy paralysis.

Juxtapose that with persistently high inflation, higher interest rates, low government spending, a weak global capital markets, and you have a recipe for lower economic growth, Ahya alluded in a note co-authored with Upasana Chachra on Monday.

Ahya cut his prediction on India’s GDP growth rate from 7.7% to 7.2% in this fiscal — the lowest estimate among various institutions.
So what would lower economic growth mean? Job opportunities will shrink, there could even be job and salary cuts as businesses stall rather than expand.

Another indicator that added to worries on Monday showed expansion at factories was the weakest in the last 20 months.

The HSBC Markit Business Activity Index, which is based on a survey of purchasing managers at around 500 companies, fell to 53.6 in July from 55.3 in June, its third straight decline. Within this data, the steepest fall was in new purchase orders, which fell 10%.

To boot, Prime Minister’s Economic Advisory Council (PMEAC) also cut estimates for growth to 8.2% on Monday from 9% earlier. The Reserve Bank of India (RBI) expects growth of roughly 8% this fiscal year.

PMEAC chairman C Rangarajan and RBI governor Duvvuri Subbarao said interest rates may have to be raised yet again if inflation has to be reined in. Rangarajan foresaw inflation remaining at 9% levels till October.

The RBI has raised interest rates by 325 basis points (3.25% in loose terms) in the last 16-17 months to bring down inflation with little success.

The flipside to a slowdown is it reduces the government’s income or revenues, because companies make less profit and therefore pay less tax.

“We see challenges not just from expenditure but also in terms of revenue,” for the government, said Shubhada Rao, chief economist at Yes Bank in Mumbai. “We need not fret about sub-9% growth, though,” she said. “It’s more important to get inflation back to acceptable levels.”

Higher inflation hurts people’s purchasing power, more so the middle and lower classes, which is a huge votebank for the government.

Inflation is being driven by three factors: structural pressures on food prices, crude and commodity prices and wage and demand pressure, Subbarao said in Visakhapatnam on Monday, adding that the performance of monsoon was not the driver of food inflation, as is the popular perception.

“Across villages in India incomes have gone up, people are eating better. People are shifting from cereal to protein. So there is a structural component to food inflation,” he said.
Indraneel Pan, chief economist at Kotak Mahindra Bank, said it will help if the government pushes forth on reforms and policies.

“The government needs to be clearer on various policies like land acquisition and foreign direct investment in retail so that the sentiment on the economy from a longer-term perspective remains intact. That will also help in the growth revival process,” Pan said.

Subbarao said it’s better to contain inflation at the cost of growth.
“You need to restrain inflation in order to ensure that our middle-term growth is sustainable,” he said, less than a week after surprising markets with a steeper-than-expected 50 basis point interest rate rise.