India's economic growth will decelerate considerably this year on account of weakening consumption, investments and exports, according to Moody's Economy.com, a subsidiary of global rating agency Moody's.
“India's growth momentum will ease in 2009 because of the expected sharp slowdown in trade and financial flows arising from the steep downturn in the world economy and global credit crunch,” Sherman Chan, an economist with Moody's Economy.com, said in a statement released on Thursday.
“Following a projected year on year expansion of 6.8 per cent in the December quarter, more disappointing results are expected throughout 2009,” Chan added.
“Slowing consumption, investment and exports will all contribute to dragging down the year on year growth rate to below 6 per cent in the June and September quarters. As a result, the 2009 annual growth rate will likely come in at 6 per cent, much slower than the pace of 9.3 per cent in 2007 and an estimated 7.5 per cent for 2008,” she predicted.
“For now, increasingly risk averse investors are shunning emerging markets. Although India's foreign direct investment inflows for the first half of 2008 had already exceeded the total for the whole of 2007, there is a risk that FDI (foreign direct investment) plans for 2009 may be downgraded.
“India is less dependent on exports compared with its neighbouring Asian economies. Still, about 40 per cent of India's total outbound shipments head for the US and EU. As both are in recession, export demand will fall in 2009, hurting local manufacturers,” Chan said.
According to Moody's, growth will be sluggish even if manufacturing manages to avoid an outright contraction.
The recently announced fiscal stimulus will support infrastructure development and keep industrial production going. However, public discontent over the size of the rescue packages will goad the government into adopting more stimulatory measures in coming months, the report said.
Moody's also said as inflation is decelerating, India's central bank will need to continue cutting lending rates to maintain an expansionary effect. The repo rate will likely be reduced to 4.5 per cent by mid 2009, it predicted.
On the positive side, Chan said the global economic downturn will bring down commodity prices, which will help containing inflation, and bring it down to the central bank's tolerance level of 5 per cent in the first half of 2009.