Sample this: India’s GDP expanded by 9 per cent in 2007-08 making it the third year in a row when the economy grew at or more than 9 per cent. This prompted many economists to say that the country’s economy had changed gears and moved permanently into a higher growth trajectory. It was also thought that the India Growth Story, driven largely by domestic demand and consumption, was insulated from global trends. The growth figures till the beginning of 2008 appeared to bear out these theses and it seemed that the economy would continue to clock strong growth for several years to come.
RBI’s policy response to combat the problem has been to further tighten monetary policy—it hiked repo rates recently, after hiking CRR in April by 50 basis points, which drained out Rs 18,500 crore from the banking system. Along with the hike in fuel prices, the rise in the repo rate is expected to take a further toll on the economy. Says Jalan: “It might slow economic growth but it was the right thing to do.”
Indian economy slowdown ahead
What these developments demonstrate is that despite domestic consumption being the key driver of India’s growth, the country is not immune to developments in the global economy. Economists feel that high commodity, particularly oil, prices will lead to sustained double-digit inflation in India, which will hit domestic demand. Then, exports, both services and merchandise, are still highly dependent on the fate of the US economy. These factors will hurt growth, which may dip to below 8 per cent, according to some estimates. Says Jalan: “The financial sector across the globe is closely interlinked. It’s difficult to insulate our economy completely from the US slowdown or rising commodity prices across the world.”
Analysts now say that much of India’s remarkable performance over the last three years was the result of favourable economic conditions the world over. A benign inflation rate and low interest rates also played lead roles in the script. Says Joshi: “We do have our domestic strengths. But there is no doubt that the global boom was also responsible partly for our growth story.” The rising global tide, which lifted all the boats, also lifted India. Now that the tide is ebbing, expect India to also feel the pinch.
Copyright©2021 Living Media India Limited. For reprint rights: Syndications Today