FE Editorial: India’s strength in this slowdown

PROJECTIONS by the IMF that India’s GDP growth will slow down from 6.3% in 2008-09 to 5.3% in 2009-10, after the conclusion of the Article IV consultations last week with India, shows that the pessimism levels have perhaps finally bottomed. This optimism hinges on the assumption that the stimulus packages and a good domestic harvest should support domestic demand. India, where the final consumption expenditure of households constitutes around 60% of the GDP, is certainly better placed to stimulate domestic demand than most other major markets. Share of consumption expenditure in GDP is much lower in China (33%), Russia (50%), and most of the low and middle income countries (averaging 56%), or even the EU (57%). India’s growth in recent years has been spurred by consumption spending, where growth has peaked at a real rate of 8.1% in 2007-08. Though the slowdown is expected to dampen the pace of consumption growth, it will still be significantly higher than in most low and middle income countries and even the euro area, where the growth of consumption spending has averaged 4.7% and 1.4% respectively, in the current decade.

Consumption demand in India will also be bolstered by substantial additions to the workforce, even though most of the labour flows are mainly to the informal sector. It should be noted that India has generated 11.3 million new jobs annually in the first half of the decade as compared to 7 million in China, 3.7 million in the OECD area and 2.7 million in Brazil. And there is also no ground for excessive pessimism on the external front. India’s inability to fully exploit its export potential will inadvertently help, given that its low (23%) ratio of exports of goods and services-to-GDP puts its on a better footing to stave off the slump in external markets, compared with countries with larger export dependence like the EU (40%), China (40%) and Russia (34%). India’s export prospects have also been bolstered by the trends in real effective exchange rates (Reer). Most recent numbers for the period September 2008 to February 2009 show that the Indian rupee has depreciated marginally during the period, and this should help as the Reer of other major currencies like the renminbi, dollar and yen has appreciated between 5% and 25%.