INDIA: THE SLOWDOWN

S&P, INDIA INC OVERDOING GLOOM ON ECONOMY?

T T Ram Mohan, Professor, IIM-Ahmedabad

The Economic Times, June 21, 2012

So you think India is doing badly? Sample this:

China's growth rate in the second quarter of the year is expected to dip below 7%. India's growth rate has tended to be, in general, two to three percentage points below that of China. If India were to grow at 5% in the second quarter, that should not be a great shock.

Brazil, another of the BRIC economies, grew by just 2.7% in 2011, down from 7.5% in 2010. The IMF projects growth in 2012 at 3%.
Among the BRIC nations, Russia alone is poised to maintain its growth rate in 2012 but that is because Russia has been growing in the past two years at a relatively slower 4%.

You can't say that China's growth has slumped because of 'policy paralysis'. China does not face the difficulties that a democracy does. To get a better clue to the slump, just see when was the last time that its growth rate fell below 7%. China's growth was 6.6% in the first quarter of 2009, which was the worst time in the sub-prime crisis, following the collapse of Lehman Brothers.

The ongoing eurozone crisis is similar in intensity and in the risk-aversion it has created in the markets. It must explain why China's growth has decelerated so acutely and also India's. It tells us that it is global factors that are primarily responsible for India's economy running into rough weather not coalition politics, lack of leadership, corruption, assembly elections or any of the things we have been hearing about.

Unfortunately, it's not just commentators who don't get it but rating agencies and a section of the business community. What the latter think does matter. Rating agencies impact the flow of capital into the country and the costs of borrowing. Animal spirits are everything in an economy and businessmen's prophecies of doom tend to be self-fulfilling.

S&P warned recently that India faces a downgrade in its rating if it does not get its policy act together. It had changed the outlook from 'stable' to 'negative' in April. Now another rating agency, Fitch, has followed suit and the reasons it has cited are almost the same as those advanced by S&P.

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