India’s global economic position

Thursday, July 03, 2008 | Posted by: Grant Thornton
Categories: | Tags: economic, global, India, India Watch, Alex Wright, South Asia Group

The global economic position so far in 2008 can be described as one of uncertainty. The collapse of the American sub-prime market and the subsequent ‘credit crunch’ have had a far-reaching impact on the global economy.

The global economy so far in 2008 can be described as one of uncertainty. The collapse of the American sub-prime market and the subsequent ‘credit crunch’ have had a far-reaching impact on the global economy.

The downturn in the US economy will undoubtedly have an impact on India, but the current predictions are that the effect will be moderate. That said, a number of repercussions are already becoming apparent.

A report on the Indian economy from the Economist Intelligence Unit found that, from the end of December 2007 to May 2008, prices in the commodities market rose by a fifth, with food items rising by 5.6%. The cost of manufactured food and other products rose by 8.5%  and 6.3% respectively.

These rises in costs are part of the reason for India’s rising inflation rate, which hit a 14 year high of 11.91% in the week ending July 5. In an attempt to slow inflation, the Reserve Bank of India (RBI) raised interest rates ahead of schedule in June, to 8.5%. The increased trade deficit, caused by, amongst other things, increased oil prices, has led to a significant weakening of the rupee against the dollar. The RBI has attempted to limit the rupee’s depreciation by selling dollars from its reserves. The Times of India reports that in the week ending June 20, the RBI’s reserves came down by almost $5 billion.

In addition, any major governmental reforms are likely to be put on hold due to the run up to the national elections, and with the Sensex share index falling by nearly a third of its value since January, investors have good reason to err on the side of caution.

Indeed, a certain level of anxiety is already perceptible in the behaviour of foreign investors in particular, with The Times of India reporting that more than $6 billion of overseas money has been pulled out of Indian shares so far this year. This has led to greater demand for the dollar and hence further weakening of the rupee. With the state of the global economy being as it is at present, it is impossible to tell when these times of high risk and uncertainty in India will subside.

However, despite an undeniable element of risk in the Indian economy at present, the effect of the decline in the US and UK markets on India is still only expected to be limited. A further report from the Economist Intelligence Unit suggests that the Indian economy will in fact continue to perform well. India’s economy grew by 8.7% in 2007/2008 (April - March) and growth of 7.7% is still forecast for 2008/2009.

The report goes on to say that India’s industrial and service sector growth will remain strong. India’s telecom and IT industries are specifically highlighted due to their rapid and continued growth, and the software industry in particular is still on course to reach its export target of $60 billion in 2010. India’s service sector accounted for 54% of GDP in 2006/2007, and this figure is expected to continue growing, albeit at a slower rate.

So, in this present tempestuous global market-place, India’s economy seems to promise more stability than most. However, as an overview, it is clear to see that India, like the rest of the world, will have to sit tight, consolidate its growth and wait for the current economic uncertainty to pass.

Alex Wright
Executive, Capital Markets, South Asia Group
Grant Thornton UK LLP