Indian economy goes into deep recession

Aug 03, 2011 12:00 AM

India faces a loss of revenue from outsourcing because of rising prices in the country. Outsources are alrady look at alternate locations and Call Centers are being moved out of the country.
These will be permanent job losses. Analysts predict that the economic deceleration that India is facing could get worse. The OECD predicts that the Indian economy is likely to “lose pace even as China and the US are expected to see good expansion in the coming months”.

Much of the inflation in India is a function of higher oil and food prices. The Indian growth story appears headed for pause. Rising prices have forced the government to steadily tighten monetary policy. Interest rates rose for the 10th time in 16 months earlier.
The slowdown is indeed getting worse. In the past few weeks the government and several research bodies cut their respective growth forecasts. The Reserve Bank of India now sees the economy growing 8 % in 2011-12, the PMs economic advisory council is pegging it at 8.2 % while investment bankers such as Morgan Stanley say it could slide to 7.2 %.

“It was the impact of the recession on non-trade financial flows that was doing the most harm to the economy. In the previous year capital inflows had broken all records and reached a staggering 9 % of the GDP. This had dwarfed the outflow on the current account of 1.5 % of the GDP and caused a sharp appreciation of the rupee.”
“The reversal of these flows after the global financial crisis are the cause of the deeper than expected recession into which India is plunging, for it has compounded the impact of the decline in exports by bringing down share prices and the value of the rupee very sharply. These have strengthened the disinclination to invest and spend just when the economy needed the opposite,” a report in an Indian newspaper said.

The reasons for the slowdown are as follows:
1) High inflation
2) Slow reform movement
3) Earnings slowdown
4) Current account deficit
5) Industrial growth

The OECD says that the “The CLIs for Italy, Brazil and India are pointing to slowdowns in economic activity relative to trend.”
In March, CLI for India stood at 99.4 as compared to 99.7 in February. CLI for India has been falling since November 2010. Higher interest rates are choking much-needed investment, which was almost flat in the first quarter of this year and grew just 4.1 % year over year, as overall economic growth slipped to 7.8 %.

Bharat’s economy showed further signs of slowdown with July factory expansion the weakest in 20 months, a government panel cutting its growth forecasts and Tata, the countries largest car maker posting a steep drop in sales.
The country has seen a marked slowdown recently with industrial output growing at a feeble 5.6 % in May, its slowest in nine months.

Businessweek puts it best: “There’s been no reform in key sectors like agriculture (resulting in crop failures, farmer suicides and poor distribution of food), infrastructure (causing blockages in transport, real estate, town planning), education (creating a severe skills shortage) and healthcare (malnutrition and poor health is stunting the physical and mental capacities of young rural Indians).”
“Just at the time the economy needs an extra internal edge to help it ride out this global malaise, India will surely be held back. However, no one is expecting a change.”

The slowdown has been on the back of rising interest rates there are other factors at work now to make it worse in the coming quarters. Delhi is seeing dangerous inflationary signs – and clear indications that its economy is going back to what was derisively called “the Hindu Growth rate“.
Rising input costs are eating in profits of Indian corporate companies brining about a profit squeeze. Sustained hardening of interest rates, will make companies increasingly shy of new investments and expanding their business. India Inc. grumbles about how dear it is to do business in Bharat -- everything is unaffordable: talent, property value, interest rates, even food.

A bad monsoon reduces the chances of a bumper crop are fading. The worsening debt scene in the US and the finances of the India government may lead us to stagfaltion similar to that faced by Japan for two decades. India is dependent on the world economy.
The slowdown in the US and the EU, coupled with a tsunami-hit Japan reduces the exports of goods and services from India. The US and Japanese slowdown is choking the flow of investment funds into the country.

The Indian government‘s large fiscal deficit has effectively wiped off the possibility of taking recourse to Keynesian measures.
The trouble in the real estate sector is only going to get worse.

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