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ECRI Predicts More Pain for Indian Economy

The New York-based Economic Cycle Research Institute, which specialises in doomsaying, has predicted more pains for India as the depreciating rupee has not only exposed the economy to a risk of stagflation, it may face recessionary pressure in the future if the current trend of low trend growth and frequent spikes in business cycles continues for long.

Stagflation in an economic situation when inflation remains high for a long time and growth falls below trend with higher rate of unemployment. Recession is contraction of an economy for two consecutive quarters.

Anirvan Banerji, co-founder and chief research officer at ECRI said that the fast descend of rupee may lead to more spikes in consumer prices and lower economic expansion.

"In any case, inflation in India is not sufficiently controlled. It is already too high. And the top it, there is the depreciating rupee, leading the economy to stagflation," Banerji said

Reserve Bank of India governor Duvvuri Subbarao however dismissed of such a threat last month saying that the central bank was sensitive to growth concerns but not at the cost of higher inflation. The banking regulator resisted itself from reducing key short term rates in its last monetary policy review as the fall in rupee makes imports costly and puts pressure on prices of essential goods.

"India also faces one-third possibility of its economic downswings turning into recessions in the long run as its trend growth has slowed and cycle volatility increased," ECRI's Banerji said in an exclusive interview with ET. He said either a higher trend growth or a lower cycle volatility reduces the risk of a recession.

Banerji said the current combination of very low trend growth and high cycle volatility across the spectrum, may lead an overwhelming majority of slowdowns into recessions, especially in the developed economies. At the other end is China, where none of the slowdowns are recessionary, because they have very high trend growth even now.

ECRI, a private forecasting firm, tracks some 21 large economies contributing about 80% of the world GDP and provides critical information about economic cycles to money managers, companies and policy makers. The institute correctly predicted the beginning and the end of the 2008 recession, relying on a series of proprietary indexes.

Banerji showed concerns over India's growing dependence on exports as most developed nations which buys goods and services from India are facing slow economic expansion. The US, one of India's major trade partner, has shrunk its imports growth to negative.

"Western economies are facing yo-yo years. This will translate in amplified form into Indian economy," the Columbia University trained researcher said. The US import is slowing and has gone into a negative zone last month. "US is behaving as if it is into a recession," he said.

"In India, trend growth in not as high as China but not as low as other developed countries. Of course, if trend growth slows further, the possibility of recession increases," said the editor-in-chief of ECRI's forecasting publications.

The country was looking to get double digit growth not too long ago but now it has settled with 5-5.5% growth. China, Brazil, Russia and South Africa -- all the other BRICS nations have slowed too. China saw a peak of 12-14% GDP expansion while it is now talking about 7-7.5% growth.

He said the low trend growth in developed economies lead to higher fluctuations in consumer demand and lower imports from developing nations. Country's which imports early stage goods and export semi-finished or finished goods like India are more vulnerable to fluctuating demand. He said that about a quarter of India's GDP comes from exports while China has actually reduced its reliance on exports to 25% from 37% earlier.