In the Global EconoMonitor, Arpitha Bykere reports 2008 growth forecasts for six Southeast Asian countries, plus India (where the forecast is for 2008-09, running from April to March). As might be expected, all of them are expected to slow down from 2007. The range of forecasts given for India is 6.9-7.7%. One commentator on this piece predicts 6% growth for India. On the other hand, the Center for Monitoring the Indian Economy (CMIE) predicted growth of 9% for 2008-09 as recently as August 19.
The CMIE logic is based on the following:
“First, it considers the Index of Industrial Production (IIP) to be faulty and does not regard its sharp slowdown in the first quarter of FY09 to be a reflection of the reality.
“Second, CMIE does not think that inflation is extraordinarily high so as to hurt growth. It believes that the Wholesale Price Index (WPI) is an inappropriate measure of inflation and the Consumer Price Index (CPI), a more appropriate measure, has seen a less vicious rise.”
A third factor contributing to the high CMIE forecast is strong investment demand. Perhaps this is a key driving force, since an increasing ratio of investment to GDP has been an important part of India’s recent growth acceleration. The CMIE report hedges a bit, suggesting that if the RBI’s tightening measures continue they may hurt growth. But I really don’t know how investment is responding to the recent tightening. If nominal interest rate rises are still running behind the rise in inflation, then the RBI’s policy is still relatively loose. The latest indications from the RBI suggest further tightening is on their minds. Bond yields, however, a measure of inflation expectations, have come down to around 8.75%, from highs of over 9.5%.
Meanwhile, the growth figure for the first quarter of 2008-09 came in at 7.9%. Apparently the latest data is showing services sector growth also coming down, following the decline in manufacturing growth (putting aside the data issues raised by CMIE).
So what is one to make of all the numbers? Looking at the growth forecasts and who is making them, I am inclined to go a little towards the higher side. If I had to pick a single number, I would go with the NCAER’s 7.8%. That would be pretty impressive. Just 15 months ago, surveying estimates of long run growth potential for India, it seemed that they were around 8%. At the time, there were fears of India overheating. If 8% is the long run trend (and it is also the RBI’s forecast for this year), then even 7% for a year wouldn’t be too bad, if there is a pick-up in 2009-10.