India May Emerge From the Slowdown This Year

Although India’s economy grew a better-than-expected 5.8 per cent in the first quarter of 2009 is still beyond the government initial expectations. Indeed, with an ongoing global economic crisis squeezing bank’s liquidity and cooling the exports sector, India’s government can forget about reaching a two-digit growth rate in the near future.

Last year, India’s stock market nearly collapsed, losing more than 50% of its value and prompting foreign investors to withdrawal its capital from India and stop financing new investments. The worldwide downturn also accelerated the currency depreciation as Indian companies unable to raise capital abroad had been turning to Indian local banks for money. To make it worst, the Reserve Bank of India had been selling its foreign-exchange reserves to support the currency, which had dropped by nearly $64 billion from a high of $316 billion at the end of May. All of this, connected with two years of rising interest rates, has brought India its own credit crunch. In fact, India’s industrial production dropped 0.8 percent in March from a year earlier, the most in more than 14 years. Moreover, exports has been on a downslide since October 2008 due to the demand recession in its key markets of the US and Europe.

However, there are plenty of reasons to be optimistic about India’s future. Mr Singh became the first prime minister since the 1960s to be re-elected after completing a full term and the promise of market-oriented economic reforms and improvement in the welfare of the poor have boosted investor’s sentiment and driven the stock market 18% since May 14. In fact, both the Indian government and the central bank have been introducing several measures to revive the deteriorating economy. In December 2008, the government announced first stimulus package, which included tax cuts, the injection of capital into banks, and allowed overseas investors to double purchases of debt. In July 2009, second measure was brought into light, providing resources to boost domestic demand, with tax cuts, and spending increases on the rural sector and infrastructure. In addition, central bank has been injecting 1.2 trillion rupees ($23.8 billion) into the banking system between April and September by purchasing government bonds and buying back market stabilization bonds. Moreover, the central bank lowered the reverse repurchase rate by 275 basis points and its repurchase rate by 425 basis points since October 2008.

Anna Fedec,
6/5/2009 4:41:34 PM