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Indian Economy to Remain Healthy

The outlook for the Indian economy remains moderately optimistic, with the DSE-ECRI Indian Leading Index rising in July to 208.2 points after first slipping in May and June to 209.9 and 205.1, respectively from 213.8 in April.

Its growth rate also picked up to 8.9% in July, after dropping to 15.4% in May and 7.9% in June from 22.8% in April. The current growth rate of the leading index is far above earlier lows although it is not as strong as it was in the spring.

Thus, growth in the Indian economy is expected to moderate but stay healthy, despite fears that the below-normal rains in this year's monsoon season are likely to curb farm production and boost inflation.

The DSE-ECRI Indian Coincident Index, a composite of variables that individually move in tandem with the economy, remains more or less upward-bound.

This is supported by the robust growth of 7.4% in GDP in the first quarter of '04-05 that was driven mainly by the increase in manufacturing sector growth to 8% and the strong growth of 9.3% in the service sector, which accounts for almost half of GDP.

The low base of 0.1% growth in the agricultural sector in the first quarter of the previous year contributed towards the higher-than-expected 3.4% growth in agriculture in the first quarter of '04-05. There was also possibly a spillover effect of the bumper rabi harvest of last year that is expected to be lowered by the kharif crop production estimates in the later quarters.

An encouraging factor with respect to overall growth, however, is the double-digit growth in capital goods output throughout the current fiscal. This should help to maintain healthy growth as predicted by the DSE-ECRI Leading Index.

A major concern is the recent rapid increase in oil prices and its effect on global economic conditions. Global growth had already started to slow even without the oil price effect, although inflationary pressures are building.

The Federal Reserve has already initiated a series of interest rate hikes and this effect is likely to percolate to other major economies. A slowdown in the US economy and a weakening in global growth can adversely impact the Asian economies, including India. This impact will be even more severe if there is also a slowdown in the global demand for IT.

In fact, there is a clear slowdown in the key economies that had driven the acceleration in global growth between the springs of '03 and '04. Specifically, growth in China's imports has reached its slowest pace in two years. Meanwhile, ECRI's leading indexes for the United States, which had correctly predicted the recent deceleration in growth, see no signs of reacceleration ahead.

Nevertheless, with all major economies still expanding, albeit at a slower pace, oil supplies are straining to meet rising demand, keeping prices high as traders fear the impact of any supply disruptions. High oil prices are likely to hurt global growth even further. Thus, contrary to the sunny forecasts issued by some official agencies, global growth is set to ease in the months ahead, with negative implications for Indian exports growth.