According to the Confederation of Indian Industry (CII) the Indian economy is set to enter a recovery phase following the slowdown in the second half of 2008-09 and a cyclical domestic downturn. The CII expects a recovery in GDP growth to 6.1 – 6.5 per cent in the current fiscal.
The apex industry body has factored in a base-case scenario GDP growth of 6.1 per cent in 2009-10 which will be driven by decline in interest rates, moderation in prices of essentials such as food and fuel and reduction in indirect tax rates.
Also the scenario has factored in sectoral growth rates including that of agriculture at 2.8-3 per cent, 5-5.5 per cent in industry and 7.5 – 8 per cent in services.Rural demand has also been strong in view of the farm sector's good performance it says. According to CII, director general Chandrajit Banerjee the fact that rural demand remains unaffected by global developments is the Indian economy's source of strength.
The report projects a more decisive recovery through monetary easing by cutting repo and the reverse repo rates by at least 50 basis points with the implementation of large infrastructure projects and revival of confidence by ensuring a business-friendly environment. It says that the implementation of such revival measures would boost the 2009-10 growth rate to over 6.6 per cent. An analysis of the financial performance of 324 companies (173 in manufacturing and 151 in the services sector) for the quarter ended March 2009 showed a slowed down in sales growth and net profit contraction during the period.
Net sales rose 8.7 per cent in the fourth quarter last fiscal as compared to a growth of 23.7 per cent in the previous quarter. According to the report the sales growth had been moderated by a corresponding moderation in raw material costs which reflected the decline in global commodity prices. The upshot was a contraction in net profits of the sample companies by 1 per cent in the last quarter of 2008-09. This marked a slight improvement compared to the contraction of 2.4 per cent in the previous quarter.
The industry body also pointed out that at a time of projected contraction of global economy and global trade it would be extremely important to maintain countercyclical fiscal and monetary policy measures. With the drivers of economic growth coming from domestic sources, the government has to maintain higher spending. This is especially so in the creation of public assets, while monetary policy should be supportive. According to Banerjee any pressure on interest rates that would rise at this juncture would crowd out private spending.
The reporte also pointed to the global financial turmoil as contributing to the sharp decline in capital inflows. During April-December 2008, while the balance of payments ran a $20.4 billion deficit, the country's foreign exchange reserves fell $57.4 billion during the fiscal.
There has been a halt in the decline since March 2009, which reflected some revival in the capital flows.
The report goes on to say that the decline has been somewhat halted since March 2009 which pointed to revival in capital flows. It proposes that policies need to be put in place to guard against future downturns to ensure India's status as an attractive investment destination that could support large FDI (foreign direct investment) inflows.