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17 signs that the Indian economy is slowing down

Last updated on: August 3, 2011 09:07 IST

17 signs that the Indian economy is slowing down

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Rediff Business Desk


There are many signs that the once-sizzling Indian economy is now slowing down.

The Prime Minister's Economic Advisory Council said on Monday that India's GDP growth will slow down to 8.2 per cent in the current fiscal. Its earlier growth projection was at 9 per cent.

And though the PMEAC's estimate for 2011-12 is higher than the 8 per cent growth forecast made by the Reserve Bank of India, it is quite lower than the finance minister's projection of 8.5 per cent.

Corruption-related issues and the government's political strategy during the recent Assembly polls have been detrimental to the chances of the economy being stimulated.

Also, political uncertainty in the West Asian and North African region, fragile economic condition in Europe and the United States has serious policy implications for India.

So let us examine some facts to see why the country's economy is slowing down.

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Image: Dark clouds are hovering over the Indian economy.
Photographs: Reuters
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1. Policy issues

The PMEAC has blasted the government for having lost momentum and not done much to revive the reforms agenda or boost the economy despite a more stable political environment prevailing in the country after the May 2009 General Elections.

Corruption-related issues have also hit India's ability to get back on the high-growth track.

Analysts believe that the global economic and financial situation is unlikely to improve anytime too soon and this will impact the Indian economy.

The PMEAC asked the government to increase its efforts for revenue collection and to reduce cases of tax arrears. It also suggested minimising avoidable expenditure and resolving the issues with states that are holding up introduction of Goods and Services Tax.

To keep the economy growing at 9% it is important to increase fixed investment rate, which is projected at 36.4% in 2010-11 and 36.7% in 2011-12.

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2. High inflation

Inflation has been a major thorn in the government's flesh. For quite a few months now it has remained totally out of control adding to the scare. Fuelled by high wages, rising property and food prices, inflation in India is at unsustainably high levels.

The PMEAC said that it was likely to come down to 6.5 per cent by March, 2012, but would remain high at 9 per cent till October.

High inflation leads to high interest rates, results in lack of investment into the economy, causes a drop in employment, eats into people's retirement funds, puts goods and services out of reach of people's hands, and slows down the economy.

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3. Rising interest rates

The Reserve Bank of India, on July 26, hiked short-term lending and borrowing rates sharply by 50 basis points for the 11th time in 16 months to try to tame high inflation, a move that would make all personal and corporate loans more expensive.

Hinting at further interest rate hikes, the PMEAC also said the RBI would have to continue with its monetary tightening policy measures to contain inflation.

Due to high cost of loans, corporates will defer their expansion plans hitting industrial and jobs growth.

To an extent, the government has been ineffective in controlling runaway inflation causing tremendous hardship to citizens and corporates alike.

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4. Oil prices going through the roof

With global fuel tags going through the roof and India having deregulated petrol prices and brought them in line with global prices, the prices of fuel in the country are at their highest levels ever.

If fuel prices keep rising, India may deregulate diesel prices too and that could have a major impact on commodity prices in India, further driving up inflation.

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5. Car sales dip for the 1st time in 30 months

The automobile sector is a barometer of the robustness of an economy. For long, India's auto sector has been booming like never before. But, for the first time in 30 months, Indian vehicle sales dipped by over 15 per cent, in July, indicating a slowdown in the economy.

High car financing costs, rise in fuel prices and the uncertainty over government's growth policies have affected automobile sales in India despite car makers offering attractive discounts.

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6. FDI inflows have dropped

Foreign direct investment into India fell to $23.4 billion in the fiscal year 2010-11. And although the PMEAC has projected that there is a likelihood of FDI inflows rising to $35 billion in 2011-12, the scenario looks bleak given the global financial crises that seems to be deepening -- from the US to Europe to Asia.

The slowdown in foreign inflows is partly due to fact that last year 30 per cent portfolio investment was in initial public offerings and follow-on public offerings that were indirect forms of FDI.

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7. FII inflows to drop by almost half

Foreign institutional investors (FIIs) are likely to infuse only $14 billion into the Indian stock markets during this fiscal year as Indian stocks lose their charm.

This $14 billion is less than half of the $30.3 billion FIIs pumped into the country in the previous fiscal.

However, as this year not many initial public offerings have hit the market, FII flows might improve when things stabilise and the stock markets begin to look up.

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8. Weakening stock/capital markets

India's stock market situation has been very volatile this year. With players hedging their bets, stock prices of several companies and public sector undertakings in which divestment was proposed in the Budget have remained low.

The retail investor too is playing it by the ear and has decided to keep off the bourses given the volatility in the capital markets.

Stock market analysts also warn that lack of structural reforms are impeding growth and will hit future expansion.

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9. Cut in fiscal spending

Although Finance Minister Pranab Mukherjee has said that he will keep the fiscal deficit under control, chances are that achieving fiscal targets set in 2011-12 Budget estimates will present a significant challenge to the government. For 2011-12, Budget Estimates of fiscal deficit for Centre are 4.7% and for the States 2.1%. The consolidated fiscal deficit, including off budget liabilities, are 6.8%. However, the PMEAC says that this might not be achieved and the fiscal deficit will remain high.

Fiscal deficit -- the difference between what governments spend and what they earn -- is expressed as a percentage of GDP. High fiscal deficit indicates a weak economy as it stops the government from funding development projects, retards growth, does not propel employment-generation and leads to higher interest rates.

Also, government spending on social welfare, education, health, poverty alleviation is severely hampered due to high fiscal deficit.

India's Current Account Deficit is $44.3 billion (2.6% of GDP) in 2010-11 and projected at $54.0 billion (2.7% of GDP) in 2011-12.

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10. Consumer spending down

Most Indian consumers have decided to go slow for the moment. Over 39 per cent consumers are looking for better deals while shopping compared to less than 30 per cent a year ago, says a research report.

This has led to a drop in sales of consumer durables, automobiles, property, bullion, et cetera further depressing an economy already under pressure.

Consumer index has slipped as consumption slowed down because of rising prices.

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11. Farm growth rate projected at 3%

The 2011 monsoon is projected to be in the range of 90 to 96 per cent of long period average. As a result farm sector output expected to grow at 3 per cent, as compared to 6 per cent earlier.

A drop in agricultural growth will pull down the overall growth of the country.

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12. Export numbers

The economic slowdown in the United States that many economists believe has already begun due to the debt crisis is likely to hit India's growth too, especially in terms of exports.

Similarly, with Europe too in the throes of economic agony, the country's exports are likely to be further affected.

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13. Slowdown in manufacturing

The manufacturing index (which constitutes 75.5% of Index of Industrial Production IIP) which registered an appealing growth of 14.5% in April 2010 is likely to slow down to slowed down to 7.1% in 2011-12. High inflation and rising cost of raw materials costs have hit the manufacturing index.

The revised series (2004-05) for Index of Industrial Production shows an output growth pattern that is fairly different from what the old series (1993-94) had indicated.

The output growth was grossly underestimated by the old series in 2007-08 and overestimated in 2008-09 and 2009-10.

The impact of the global crisis on industrial output was much stronger than had been indicated by the old series.

Even the six-core sector industries -- crude oil, petroleum refinery, cement, electricity, finished steel and coal -- showed signs of weakening.

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14. Business confidence slips

The NCAER-MasterCard business confidence index in India fell to its lowest since October 2009. A component of the index that measures confidence in political management of economic policies dropped 26 points to 77.6 in July from 103.6 in April.

India's Economic Confidence too dipped by 2 points in the month of July compared to that in May, although it still stands as the 3rd most economically confident country, according to a major analysis of world public opinion done by market research company Ipsos.

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15. Advertising has been cut to a minimal

The Indian advertising sector and the media are experiencing the brunt of the current economic situation. Corporates have cut down on advertising expenditure indicating a slowdown in the economy.

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16. Stagnation in real estate sector

The property market too has remained stagnant as housing costs go through the roof with builders unwilling to drop prices.

Many analysts believe that there might be a bubble in the making in the Indian real estate sector and that it might burst sooner than later.

Whether property prices crash or not, the fact is that at the current price levels, buying real estate is the last thing a common Indian can afford.

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17. Jobs

While globally jobs are being slashed by the thousands due to harsh economic conditions, luckily India has yet to face this problem

With most India employers optimistic about hiring, recruitment agencies say that the days of hiring in large numbers have gone for now. Companies are looking more at the right talent than numbers.

And although India is yet insulated from the global wave of layoffs, if interest rates keep rising and the economy does not start looking up again, cost-cuts and job-cuts might not be something that can be ruled out.


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