Wednesday, July 30, 2008

Indian Economy is heading toward slowdown ?

Last week I was talking with Prof. Ramaswamy a senior consultant at one of renowned Economic institution at New Delhi, when he asked me how I am doing in my new job? I told him that here is slight slowdown in business and sales figures are going down month after month. Further to this all major players in the industry have postponed their requirements due to high inflation rate, soaring steel prices, hike in interest rate and adverse cash flow ratio. On this Prof. Ramaswamy told me that this slowdown is just starting and may continue for two or three years. This slowdown is not sector specific, but is throughout Indian economy.
India has fortunate run of high growth rate averaging about 9% (8.8% to be precise) in the last five year. However picture has now turned, growth will be lower in the coming year although it is not cleared by how much. Early projection by different agency varies from as low as 7% by J P Morgan Chase to more optimistic 8.5% by RBI. Different agencies have different methods of forecasting GDP growth. I have specific interest in the method adopted by ICRIER (Indian Council for Research on international Economic Relations). ICRIER attempt to forecast GDP growth by using composite index of leading economic indicators for Indian economy.

For constructing the index of leading economic indicators (LEI) following eight indicators have been selected:
1. Production of machinery and equipment.
2. Sales of heavy commercial vehicles.
3. Non-food credit.
4. Railway Freight traffic.
5. Cement sales.
6. Sales of corporate sector.
7. Fuel & metal prices.
8. Real rate of interest.
The relation between GDP growth as the dependent variable and composite index of LEI as the independent variable has been estimated and accordingly projections are carried out on a quarterly basis.
This quarterly projection worked out the GDP growth rate of 7.8% for 2008-09 compared to actual GDP growth of 9% for 2007-08. This is not a sharp slowdown, but this can further go down in 2009-10. It is quit possible that Indian economy has headed toward medium term downtrend
Acceleration of reform in various areas is the only way to raise economy’s potential rate of growth. Unless government vigorously pushes forward with reform in areas ranging from agriculture, infrastructure, education, business, climate, public services delivery to retail trade, we will not see return of high rate of growth.
Aniruddha Nandawar