Declining GDP growth estimates now at 7.1 per cent

New Delhi: The government's economic advisory body, the Prime Minister's Economic Advisory Council, has revised downward, once again, the final GDP estimate for 2008-09 to 7.1 per cent.

Falling well short of the earlier estimate of 7.7 per cent made in July 2008, the new lower estimate comes close on the heels of neighbour China lowering its own gross domestic product (GDP) estimates to 6.8 per cent.

Investment is expected to fall as well, by around 2.5 percentage points to 35 per cent of GDP by the end of the fiscal on account of the ongoing global financial crisis, an erosion of investor confidence and depressed business conditions, the economic review for 2008-09 said.

In August 2008, CMIE had projected GDP growth at 9.4 per cent (See: CMIE projects 9.4 per cent GDP growth in 2008-09). Prior to that estimate the CMIE had revised its earlier projection of 9.1 per cent GDP growth to 9.5 per cent. CMIE kept GDP growth forecast above the 9 per cent mark despite the gloomy forecast of a 7.7 per cent growth projected by the prime minister's Economic Advisory Council at the time.

Later, in September 2008, UNCTAD had set India's GDP growth at 7.6 per cent. (See: Unctad sets India's GDP growth at 7.6 per cent; global growth to average 3 per cent in 2008). A report of the United Nations Conference on Trade and Development said that India's economic growth would moderate to 7.6 per cent in 2008, lower than the government's own conservative estimate of 7.9 per cent at the time. Unctad said world output would grow by an average 3 per cent in 2008, about one percentage point less than in 2007, as GDP growth in developed countries hover around 1.5 per cent.

In October 2008, finance minister P Chidambaram said eight per cent growth was possible, and that next fiscal, it would actually be nine per cent. (See: 8 per cent growth this year possible, asserts Chidambaram; 9 per cent in 2009-10)

Chidambaram's remarks in October came despite the pessimism of the falling stock markets across the globe amidst concerns over business and industrial growth at NDTV Business Leader of the Year Awards Function in New Delhi. Addressing that gathering, Chidambaram had said, ''There is a storm blowing across the world. India will be affected to some extent, although indirectly, but Indian business and industry have placed India in a situation where we can weather the storm."

In November, the prime minister himself said that growth would fall to below 7.5 per cent next year. (See: Economic growth will fall below 7.5 per cent next year: PM)

The PM said the economy would grow at a slower pace of 7-7.5 per cent next year against the 8.0 per cent growth projected for the current fiscal, attributing it to the slack growth to a general fall in consumption and said it can be reversed to a certain extent through increased investments in the infrastructure sector. ''Due to the current financial crisis, growth rate may come down somewhat next year, but I am still confident that we will be able to achieve a rate of between 7-7.5 per cent,'' he said addressing the Indian community in Oman.

Rating agency Moody's, in December, said India's GDP growth would be seen slipping below 6 per cent next fiscal. (See: India's GDP growth seen slipping below 6 per cent next fiscal). It said India's gross domestic product (GDP) would grow at a much slower pace in the next few quarters unless the government comes out with a stimulus package to boost both domestic consumption and exports, at a time when official estimates put India's growth rate at 7.6 per cent in the second quarter (July-September 2008-09) and by over 9 per cent in the whole of the previous year.

Different agencies have been projecting the country's growth rate between 7.6 per cent and 5.3 per cent. Moody's expected India's growth to fall to less than 7 per cent in the next four quarters.

Soo after, CMIE revised downwards its own estimates again. (See: CMIE lowers India's FY09 growth projection to 7.5 per cent). The Centre for Monitoring Indian Economy (CMIE) lowered its projection to 7.5 per cent from its earlier estimate of 8.2 per cent, saying it now expected the Indian economy to grow at a slower pace due to the global financial market meltdown, which would result in slowdown in some sectors.

The impact of the global crisis on the Indian economy would be considerably greater in the third quarter of the current fiscal (October-December), CMIE had said.

Towards the end of December, the government said that GDP growth could actually dip to seven per cent in the second half of the year (See: GDP growth may dip to 7 per cent in H2 2008-09: government). It said growth would be significantly lower, at around 7 per cent, in the second half of fiscal 2008-09 as the impact of slower export growth and weaker domestic demand, including a possible dampening of private investment, begin to be felt.

Now, the EAC's recommendation to revive growth is for RBI to lower key rates and additional spending by the government, comes at a time when the Reserve Bank of India (RBI) is set to release its third-quarter review of monetary policy on Tuesday.

For the second half of 2008-09, EAC chairman Suresh D Tendulkar said that growth would be much slower, "maybe of the order of 6.5 per cent" though it would recover well during the second half of next year. The consolidated fiscal deficit of the Centre and the states would balloon to over 10 per cent of GDP by the end of the year on account of the various stimulus packages announced by the government, a relaxation in deficit targets for states and additional government borrowings.

The EAC ticked off banks for their reluctance to lend, in spite of an easing of the monetary policy. Tendulkar was quoted by reports as saying that the crisis of confidence that not justified by objective circumstances. He said that there is "irrationality" in consumers not spending, investors putting off plans, and banks not lending.

The EAC expects India's growth to post a fairly strong recovery during the second half of 2009-10 around which time developed economies around the world are expected to climb out of recession. The economic outlook said that after remaining relatively weak until the first quarter of the next fiscal, growth would smartly pick up thereafter. It is expected to be moderate across sectors, with the exception of agriculture which has not seen much of an impact from the global financial crisis.

The projection for industrial and manufacturing sector growth during this fiscal has been lowered to 5.1 per cent and four per cent respectively, from the earlier 7.5 per cent and 7.2 per cent. Services are expected to grow at around 9.3 per cent.