Survey links recovery to US developments, policy reforms

The speed at which the Indian economy returns to the high growth path in the short term depends on the revival of the economy, particularly the US economy and the government's capacity to push some critical policy reforms in the coming months, according to Economic Survey 2008-09 presented to Parliament by the finance minister Pranab Mukherjee today.

If the US economy bottoms out by September 2009, there would be good possibility for the Indian economy repeating its 2008-09 performance, (ie, around 7.0 +/- 0.75 per cent in the fiscal 2009-10 (assuming a normal monsoon)). However, in the event of a more prolonged external economic downturn, the revival of the global economy/US economy being delayed until 2010, the growth may moderate to the lower end of the range, the survey says.

While the Survey says the likely developments in the external sector may assist a recovery, the declining trend in trade deficit suggests that with reasonable invisible account surplus, which has been an attribute of Indian economy for the last several years, the economy may end up with a current account surplus of 0.3 to 2.8 per cent of GDP in 2009-10.

The prospects of the Indian economy are somewhat different from most other countries because of a large domestic market, a resilient banking system and a policy of gradual liberalisation of capital account, the Survey notes. However, a sharp dip in the growth of private consumption is a major concern, the Survey says.

The survey attributes the slowdown in the Indian economy to four factors:

• The wealth effect, resulting from decline in the equity/property prices;
• The uncertainty in the labour market and some decline in employment.
• Cutbacks in consumer credit by private banks, NBFCs and other lenders.
• A dominance of precautionary motive which may induce consumer to either defer their spending decisions or shift to unbranded alternatives.

The Survey goes on to note that there are early signs of recovery in the global economy manifested in rising stock prices and increasing price of commodities. It is however, debatable whether rising prices are an indication of green shoots of recovery or a result of position taken by financial investors seeking to benefit from global recovery expectations.