Crisil presages growth rate slowing down to 7.9-8.4%

MUMBAI: Indian economic growth is expected to moderate to 7.9-8.4% in 2007-08 from close to 9% in 2006-07, according to a report by financial rating agency Credit Ratings & Information Services of India Ltd (Crisil).

“The 7.9-8.4% growth rate constitutes a slowdown, which is the impact of interest rate hikes and liquidity pressures,” said Subir Gokarn, executive director and chief economist, Crisil.

Other economic research think-tanks are also expecting a slowdown. Delhi-based Indicus Analytics is expecting a growth rate of 8.38% in the next financial year.
Gokarn said the interest rate hikes by the Reserve Bank of India will continue till inflation and growth moderate around their targeted levels.

“The RBI, in its policy, has been signalling a growth rate of around 8.5% and inflation rate of 5.25%. Unless this happens, monetary actions will continue,” Gokarn said.
The growth momentum is vulnerable to high inflation and domestic overheating, while slowdown in the US and China could be key international factors, Gokarn said.
Despite the projected slowdown, Crisil is upbeat on the overall performance of the economy.

“Investment and consumption are the twin engines of growth. Though consumption contributes 60% of the GDP, the growth rate is mainly driven by investments,” Gokarn said.

Strong industrial and infrastructure investments will reverse the current trend of rising operating rates by 2008-09, the report said.

Growth will be driven by investments in sectors like metals, automobiles and cement, owing to capital expansion and resulting investments in plant and machinery and a rapid growth in the construction segment led by the non-housing sector.

Investments of around $57 billion are expected in the metal sector in the next five years, according to Ajay Dwivedi, CEO, Crisil Research & Information Services Limited.
Growth in construction would be led by sectors such as ports, airports and office space, with the share of housing investments in construction likely to decrease from two-thirds in the past five years to less than 60% in the next five years, Dwivedi said.

Investment growth would be the largest in roads, railways, urban infrastructure and irrigation.

However, investments in the housing sector, which are led by urban activity, may see a slowdown over the medium term, as real estate prices have begun to push the limits of affordability, the report said.

The young and diverse population in India is expected to create strong opportunities for growth in consumption.

“India is a large country but a very diverse consumption market - she is many nations rolled into one from a purchasing power parity (PPP) perspective. However, expanding rural employment, and thus consumption, will be a key challenge, to be met by increasing education levels and skill enhancement.”

“Education infrastructure needs to be set right. Also the dichotomy is an opportunity as urban penetration is high compared to the rural market, which means that there is scope for a product to be designed for the rural market,” Dwivedi said.

Crisil analysts also called for clarity in private sector participation in the infrastructure sector while predicting that the government will soon take the role of a facilitator.

“Urgent investments are required to expand capacity in the power sector and transportation sectors like roads, ports, airports and railways. Over the years, the government is slowly changing its role from being the sole agency to provide infrastructure to that of a facilitator, creating an enabling environment for the private sector to emerge as a key provider of infrastructure.”

“India is poised to see significant private investments in the telecom, road, power, port and airport sectors. The country has already experienced significant successes in each of these areas and more private sector money could be expected to drive investments in these sectors,” said Rupa Devi Singh, director, Crisil Infrastructure Advisory.

The metro airports are already privatised and more opportunity would come when airports in smaller cities are transferred into private hands, Singh said.