New Delhi - India, once safely cocooned from the world economy, is struggling to maintain its rapid economic growth as a global recession spreads its tentacles. But its carefully graded integration with the world economy may have cushioned India from the worst of the current global financial volatility, analysts and officials said.
After posting gross domestic product growth of about 3 per cent for decades since independence, India averaged over 9 per cent annual growth for the past three fiscal years.
But now the quick pace has slowed down and the government's revised estimate for the current financial year is around 7.5 per cent, while independent analysts are projecting 6 per cent.
India's quick growth, second only to China, has been partly powered by the very opening up that now brings the blues. It was supported by an enterprising industry and a growing market among an increasingly better-off middle class estimated to number 300 million people.
Initially, India did not expect to be hugely impacted by the financial crisis spawned in the US. But as the stock market tumbled, exports dropped, the service industry, including information technology, felt the heat and the manufacturing sector went sluggish, the government recognized that the immediate future looked grim and it had to take pro-active measures.
"Contrary to earlier expectations that emerging economies will be only marginally affected, (we find) the transmission to emerging economies is taking place via both trade and financial channels," India's federal bank governor D Subbarao said while announcing a package of financial incentives on December 6.
Economic liberalization and India's prospects as a prime emerging market had brought a flood of investment from foreign institutional investors (FIIs). But the same FIIs, which had pumped more than 17 billion dollars into India in the 2007 calendar year, withdrew an estimated 13 billion dollars in 2008, directly impacting the stock markets.
The 30-share Sensex of the Bombay Stock Exchange dropped by about 60 per cent since January, wiping out the savings of many small investors.
The export industry was particularly hard hit by the global recession. Merchandise exports dropped by 15 per cent in October compared to the same month in 2007.
Exports comprise only about 22 per cent of GDP in India, compared to China where it is over 80 per cent. But the industry includes labour-intensive segments like textiles and garments, gems and jewellery, handicrafts, and marine food processing. Reports have started coming in of lay-offs across the country.
Inflation, linked to wholesale prices, crossed double digits mid- year but dropped to 8.84 per sent in late November.
"India has the largest population of poor in the world. A bulk of their earnings are spent on food and inflation hits them hardest. The prices of food are still going up, only at a slower rate," economic analyst Paranjoy Guhathakurta said.
Added to all these woes is a weakening rupee and adverse sentiments sparked by a string of terrorist blasts in major cities and the November 26 attack on Mumbai, India's financial capital.
Caught in a bind trying to balance inflation with the need to inject liquidity in the economy, the government announced a slew of fiscal incentive measures in early December.
The incentives are aimed at the export industry, realty, infrastructure and the financial sector and are largely in the form of interest rate cuts and tax and duty cuts, but they would still increase substantially India's budgetary deficits.
"In the face of the recession, India now has to follow the classic Keynsian concept of borrowing and if necessary, of printing more notes," Guhathakurta said.
But what enables India to hope to maintain the positive growth rate when bigger economic powers are already in the throes of recession?
It is the stability provided by the huge domestic market, a growing youthful work force and enterprising industry, along with a still closely-regulated banking and financial system and the conservative saving habits of its people, analysts said.
"Sections within the ruling political alliance and the bureaucracy are inherently cautious and it has worked to India's advantage," Guhathakurta said.
The ruling alliance's left-wing partners, who withdrew their support to the government earlier this year, played an important role in holding back any liberalization overdrive.
The thrifty Indian family helped to maintain stability by parking the bulk of its savings in bank and post office deposits, in gold and property. "Most of them don't survive on credit. Therefore, the bubble that burst is much smaller," Guhathakurta said.
The fall in international crude oil prices is a positive development. India imports over 70 per cent of its energy requirement.
"The fundamentals of our economy continue to be strong. Once the crisis is behind us, economic activity in India will recover sharply.
But a period of painful adjustment is inevitable," Subbarao said.
