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6 key dangers to Indian economy
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September 11, 2007 09:16 IST

While the US Fed continues to give confusing signals regarding the subprime meltdown and the status of economic growth in the US, its counterpart in India continues to make candid acknowledgements of the past and projections of what lies ahead.

Although the Reserve Bank of India [Get Quote] (in its Annual Report 2007) reiterated its faith in the Indian economy clocking nothing less than 8.5% GDP growth in this fiscal, the central bank has also put forth some key concerns that have the potential to derail the growth engine.

1. Uneven rainfall distribution: As per the RBI, although the cumulative rainfall during the monsoon so far has been 7% above normal, it has been very uneven in terms of temporal and spatial distribution.

The uneven distribution of rainfall has impacted the agricultural production that has decelerated from an annual average of 4.7% per annum during the 1980s to 3.1% during the 1990s and further to 2.2% during the Tenth Plan period. Per capita annual production of cereals declined from 192 kg during FY05 to 174 kg during FY07 and that of pulses from 15 kg to 12 kg over the same period.

Per capita availability of foodgrains has, thus, fallen close to the levels prevailing during the 1970s.

2. Power shortage: The power shortage of around 10% and a peak hour shortage of over 13% is a deterrent to the sustained current high growth phase. In the Tenth Plan, capacity addition was around 50% of the target.

Expansion of private investment in the power sector has been constrained due to perceived lack of assurance of timely payment for power supplied or as contracted. The gas-based power plants, which account for about 11% of the installed generating capacity, are operating below their capacity in view of inadequate supply of gas and constraints in using alternate, high-cost fuels such as naphtha and high-speed diesel.

Transmission and distribution (T&D) losses remain unacceptably high, ranging from 30% to 45% in many states.

3. Labour issues: While it is encouraging to note that employment generation in the economy accelerated during the Tenth Plan period (FY02 to FY07) from the preceding period, the growth in employment during the respective periods, however, still trailed the growth in labour force over the same period.

Moreover, it was the unorganised manufacturing sector that generated more employment in recent years. The sustained growth in industry is, therefore, vital to generate employment opportunities and to absorb the disguised labour force dependent upon the agricultural sector.

The annual growth in employment during the Tenth Plan (2.5%) has been marginally lower than that of the labour force and as a result, the unemployment rate rose from 2.8% in FY00 to 3.1% in FY07.

4. Consumption slowdown: Lead indicators of consumption growth i.e. growth in tourist arrivals, revenue earning freight traffic of the railways, new cell phone connections, export cargo handled by civil aviation, passengers handled by civil aviation, cement, steel and bank credit have shown signs of moderation in FY08 so far.

Growth of non-food credit was 23.6% in 1QFY08 as compared to 32.5% in 1QFY07. The same is expected to remain within the range of 18% YoY to 25% YoY over the next 2 fiscals given the estimated growth rates and inflation during this period.

5. Low welfare expenditure: The shares of public expenditure on education and health in India are still low by international standards. In 2004, the share of public expenditure on health in India at 0.9% of GDP was lower than Brazil (4.8%), China (1.8%) and least developed countries (1.8%).

Re-prioritisation of expenditures towards social sectors along with higher capital outlays are the only means of improving the social infrastructure and provide productivity gains.

6. Global meltdown: According to the estimates by the IMF, global growth is likely to moderate from 5.5% in 2006 to 5.2% each in 2007 and 2008. Growth in the world trade volume is also expected to decelerate from 9.4% in 2006 to 7.1% in 2007 and 7.4% in 2008.

The emergence of protectionist pressures, further rise in oil prices, persisting global imbalances, adjustment in the US on account of housing slowdown and potential shifts in financial market sentiment pose downward risks to global growth prospects.

If these risks materialise, they could have some adverse impact on the domestic economy as well. Conditions in the subprime mortgage sector in the US have the potential for rise in delinquencies and could lead to reassessment of risk by investors across products and markets and retrenchment of capital from the emerging market economies, given the contagion and herd mentality.

RBI's testimony thus highlights the need for appropriate macroeconomic policies to avoid risks of financial imbalances and recurrence of inflationary pressures while facilitating the growth momentum in an inclusive fashion. In this regard, policy priority needs to be accorded. is one of India's premier finance portals. The web site offers a user-friendly portfolio tracker, a weekly buy/sell recommendation service and research reports on India's top companies.

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