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4 | ifr special report | September 2009 ECONOMIC OUTLOOK


India’s surprise recovery


India’s economy is set to grow between 5%–6.5% in 2009, well above early expectations, thanks to an ambitious stimulus package and an improving global economy, which have bolstered domestic consumption and industrial output.


industrial output has increased significantly. “The impact of the recession has been far less severe than expected and the industrial and services sector are performing very well,” said Kevin Grice, an India economist at Capital Economics in London who forecast Asia’s third-largest economy would grow 6.5% this year and 7.5% in 2010. Like other economists, Grice said robust industrial production would offset losses from this year’s monsoon drought, which is expected to curtail rainfall by 13% from June-September, according to the Indian Meteorological Department. So far, rainfall is down 26% from normal levels although it has improved in recent weeks. In June, industrial production soared 7.8% – reversing a 16-month slump – showing that the economy was on a firm path to recovery. Economists expect production to remain robust in coming months, helping India’s US$1.2trn economy outperform all other Asian countries except China, which is forecast to grow 7%–8% in 2009.


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Factories aside, Grice said Indian reforms to curb the country’s reliance on agriculture output would help cushion the drought’s impact. Agriculture now accounts for 18% of GDP, compared with 25% a decade ago, he said.


Falling rain


Grice said the poor rainfall will trigger a 2% decline in farming output this year and knock 0.5% –1% off headline GDP. Still, this is significantly better than in 2002 when a 19% drop in rain depressed GDP to 3.8%, its lowest performance in 11 years. Some economists were less optimistic, however. Deepak Lalwani, an investment director at Astaire Investments in London, said the drought could dent this year’s growth to 5%–5.5%. While he has a 6.1% GDP forecast, he said low rainfall could wipe as


hile this year’s growth will be lower than 2008’s 6.7% rise, it is expected to come in above earlier forecasts of as low as 4% as


much as 4% off agricultural gains. Economists differ on the drought’s exact impact, but most agreed big gains in the industrial sector would offset agricultural losses. The state is not taking any chances, however. At the time of writing, the Indian government was rushing to avoid a crisis and announcing plans to raise farming subsidies by US$59m to provide more seeds to expand crops and boost market prices. The aid package is expected to total US$12.3bn this year, up 15% from 2008. Delhi will also maintain its rural aid initiative, through which it provides tax incentives, cash handouts, investment initiatives for key crops and rural employment programmes. As the global economy strengthens, exports are forecast to swing into positive territory by the end of 2009, economists said. They fell 31% to US$35.4bn in the first three months of fiscal 2009, which began in April and ends next March. Plummeting exports in 2008 caused 500,000 job losses across 10 industries. To boost exports, Delhi is rolling out aid programmes to help exporters find new markets as it strives to lower India’s dependence on trade with the US and Europe. Exports account for 25% of GDP, but this is expected to increase as India enters new markets and launches reforms to expand its low-cost manufacturing base (by introducing more flexible labour legislation) to take on China. According to Grice, India’s move to diversify its exports has helped foreign trade recover more quickly than in the rest of the region. Still, the country was years away from recovering the 20%–25% pre- recession export growth, he said. Economists have applauded Delhi’s stimulus package for working wonders on the economy, which expanded 6.7% in 2008 – an impressive feat even if it was the below the average 8.5% growth of the preceding five years.


Under the initiative, which was more ambitious than many expected, the country announced it would spend Rs3trn


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