More shocks could be in store for India

By Geetha Bhaskaran, Special to Gulf News
Published: December 13, 2008, 23:45

Mumbai: There is little conviction that Indian shares have seen the worst of times after bouncing back last week, with economic data indicating there could be more shocks in store and a possible cut in official growth forecasts.

For months the authorities, from the finance minister downwards claimed that the global financial crisis would have only a limited impact on India, because its $1 trillion (Dh3.8 trillion) economy was mostly driven by domestic demand and was less dependent on export markets.

It was a fallacy as data on Friday brought home the bitter truth.

Industrial output in October fell for the first time in 15 years, declining 0.4 per cent from a year earlier and below market expectations of a rise of more than two per cent.

Manufacturing, which contributes 80 per cent of industrial output, fell 1.2 per cent in October.

The market already knew that a credit crunch, high borrowing costs and a slowing economy had dented spending by consumers, but most econ-omists believed the growth rate would have slowed but not actually fallen.

Exports shrinking

Exports in October shrank 12.1 per cent for the first time in almost three years, to $12.82 billion from $14.59 billion in the same month in 2007, and analysts said the outlook remained bleak over the near term.

"The signs are of a deepening economic crisis," said Biju Dominic, an investment consultant who advises retail clients in Mumbai.

"The data for November will be worse, as auto numbers indicate."

Car sales in November dropped by a fifth while truck and bus sales nearly halved.

"Preliminary export data point to another month of negative growth," Tushar Poddar, an economist at Goldman Sachs, said.

"We therefore expect overall activity to be sharply lower in the second half of fiscal year '09, after growing by 7.8 per cent in the first half."

Before the factory output data came, the Reserve Bank of India Governor D. Subbarao had warned that India faced a period of painful adjustment after the global financial crisis froze credit markets in October, and it might lower 2008-09 GDP growth forecast from 7.5-8.0 per cent.

He also said 2009-10 may be a "more difficult year".

"Clearly, both domestic demand and external demand have collapsed more than expected," The Econ-omic Times wrote in an editorial Friday.

Little hope

"There is very little hope that external demand will pick up anytime soon. Therefore the solution lies in stimulating domestic demand."

Most private sector econ-omists have slashed their growth forecasts.

"Our estimate for GDP growth remains below consensus at 6.7 per cent for fiscal year '09 with further downside risks, and 5.8 per cent for fiscal year '10," Poddar said in a report.

Morgan Stanley last week cut its forecast for India's economic growth in 2009-10 to 5.3 per cent from 5.7 per cent, citing higher cost of capital which could crimp domestic demand.

"Dislocation in global capital markets has resulted in a sharp reversal in capital inflows, pushing up the cost of capital," it said, adding that India's growth of nine per cent in the past three years was helped by large capital inflows.

The Reserve Bank of India, which cut its key short-term lending rate by one percentage point on December 6, will probably lower it by 1.25 percentage points by the end of 2009, Morgan Stanley said.

"While Indian policy makers have been taking co-coordinated policy action, incremental data both on the global and domestic front continue to be worse than anticipated," Rohini Malkani, economist at Citi, said in a report.

Still, the benchmark Sensex rallied 8.1 per cent last week, its best weekly rise in six, to 9,690.07 as a stimulus package of rate cuts, $4 billion extra spending and duty reductions drew in foreigners who had been sulking for months.

Petrochemical and refining giant Reliance Industries, which has begun pumping gas from its offshore field in the Krishna-Godavari basin, led the market higher racing almost 17 per cent on the week to Rs1,306.20, its best close in a month.

"We saw some risk appetite returning to the market," said equity trader Anmol Patel. "It's not clear whether this indicates a change in trend or just a temporary blip."

He said massive amounts of liquidity injected to the global economy by countries from the US to Australia would at some point bring large inflows to India, which is still one of the better performing econo-mies compared to the US, the euro zone and Japan.

Data showed foreign funds bought $565.5 million of Indian shares over five sessions till Thursday. The inflows also helped the rupee climb 2.4 per cent last week to 48.33/34 against the dollar.

However, the rupee is down almost 19 per cent this year, while foreign fund withdrawals are at $13.3 billion so far in 2008 and the Sensex has lost more than half is value.

- The writer is a journalist based in India.