Indian Growth Story- Gloom or Bloom
Posted : July 30, 2008 at 5:28 am [IST]
What happened in Lok Sabha on July 22 must have heartened many, though the climax with Rs 1 crore on table might have made some morose too. Record high inflation is hurting the majority of middle class badly. Interest rate is causing further damage. I don’t understand why following the textbook rules, the banks must increase the interest rate to reduce inflation. Stock market has made many poorer. The India’s foreign exchange reserves remain still at around $300 billion. The International Monetary Fund (IMF) has lowered India’s growth forecast to 8 per cent in 2008-09 (9.3% in 2007-08). According to some, the figure may go lower. One of the global rating agencies, Fitch lowered India’s credit outlook. FM advises not to mourn 8% but to celebrate: “Very few countries and hardly any large nation except China are growing at eight per cent, and eight per cent growth will still be higher than the average rate of 5.8 per cent achieved during the six years of NDA rule.” I hate him comparing with NDA rule after four years in office.
However, many have positive outlook for India’s growth.
A group of top economists from Ernst & Young believe that India is on track to surpass China in growth. “We believe this is India’s moment,” declares Keystone Chief Economist William T Wilson.
Interestingly, the companies are ready to face the situation and to change strategies for keeping the growth going. For instance, big IT companies such as TCS and Infosys were in the auto component design space for a few years now. Now even the relatively smaller ones such as KPIT Cummins Infosystems, Onward Technologies, Neilsoft and CADES among others are getting into the automotive design business for better margins and higher growth in these times of economic slowdown.
Private sectors are moving fast with many achievements. New airports at Hyderabad and Banglore have come in operations. The country’s biggest private sector port has started working in Andhra Pradesh.
A yet to be released white paper, ‘India’s Role in the Globalization of the IT Industry’ by Evalueserve, a KPO, forecasts, “India will create the second largest IT services labour pool after the US within the next seven to eight years. By 2015-2016, the number of professionals working in the IT industry will grow ten-fold (from 2001-2002) and the total revenue will grow 22 times.”
Indian outsourcers are competing well with MNCs and going global. The increasing complexity of contracts with big U.S. customers; growing wage pressure at home; the rising value of the rupee; and a fierce counterassault by IBM, Accenture, and Electronic Data Systems (EDS) (recently purchased by Hewlett-Packard Company) have obliged the Indian companies- Satyam, Wipro, Infosys, Tata Consulting Services, Cognizant Technology Solutions, and HCL Technologies- known by the acronym SWITCH, to go global and create new multinationals that are much less India-focused. The battle between the fast-growing Indian outsourcers and the big U.S. firms shapes up as an intriguing test of the ability of companies from emerging countries to go toe-to-toe with the best that the West has to offer. And the world is to wait and watch who wins.
With a total of 282 outsourcing contracts valued at $49 billion in total contract value (TCV) and $10 billion in annualised contract value (ACV), the IT outsourcing industry notched up record business during the first two quarters of the current calendar year, according to TPI, the sourcing data and advisory firm. IT companies such as Wipro (25%) and Satyam (45%) are still making pretty high profits in Q1. Even manufacturing companies such as Hyundai projects to double export figures this year.
Private business houses and its associations are still ambitious and wish to keep the India’s growth story exciting. According to Confederation of Indian Industry (CII), “India can record a GDP growth rate of about 8.6 per cent during 2008-09, given the increasing capital expenditure by the private sector and the healthy incremental capital output ratio of around 4.”
Mumbai-based Centre for Monitoring Indian Economy (CMIE) expects the Indian economy, driven by large capacity additions, to expand by 9.5 per cent during the current year. According to CMIE estimates, fresh investments of Rs 4,44,708 crore over 400 projects were announced in the first quarter (April-June) of this financial year alone. This comes on the back of equally robust numbers in 2007-08, when more than 3,000 new projects, entailing investments of over Rs 17 lakh crore, were announced. There were 14,450 projects with committed investments of more than Rs 61 lakh crore at the end of 2007-08 with maximum number of projects covering key sectors like power, services, construction, mining, machinery, chemicals, metals and metal products.
How can with impending slowdown the capex boom in India would have continued? How could more and more fresh investments get announced every quarter?
Let the politicians not spoil the boom party even in the gloom of terror created by the sick minds.
- Indra
Category: Industry/Management |
1 Comment »
RBI is increasing inflation instead of controlling it!
The action taken by RBI to control inflation is not admirable. The tool of interest is spoiling our nation. Every time attempt to control inflation through altering interest rate is easy for RBI, but disastrous for the economy. RBI should revisit the decisions taken up to control inflation. Interest can affect liquidity and control inflation for time being by curbing the demands but cannot control ultimate inflation as the higher deposits at banks will yield higher interest expended over those deposits which in turn enhance the purchasing power of the depositors with no increase in real GDP. Thus this practice by RBI to control inflation itself leads to inflation.
The annual interest income by banks is over 5% of GDP at Market Prices. It means the prices of commodities and services produced with help of bank credits would be increased by at least 5%. Interest income by banks thus increases the price levels by minimum 5%. Moreover the interest expended by banks over deposits is over 3% of GDP at Market Prices. It means the deposits buying capacity would be increased due to interest while GDP remaining unaffected; the price level would further increase by at least 3%. So due to interest earned by banks and expended over deposits, the price level increases by over 8% per annum. In this situation if interest rate is further increased, the inflation will not be controlled, rather stagflation will increase. Already we can see that our total final consumption expenditure as % of GDP at market prices is declining from 67.8% in 2005-06 to 65.5% by 2007-08. This decline along with inflation cannot be controlled by increase in interest rate. On the contrary, we need stimulator for productivity and sales in the real market, which requires reduction in interest rate.
The practice of RBI to control inflation by interest rate is disastrous for Indian economy and should be questioned. The role of interest to control liquidity is not questionable but its impact over income level of depositors, borrowers and the price level should be re-considered and it is important that RBI should review these impacts. It should be noted that if banks expend worth 3% of GDP at market prices as interest to deposits, the liquidity automatically increases without real change in GDP, thus causing inflation.
We should consider and find long term solution for instability in financial and real markets. If RBI or financial sector regulators wish, Islamic ethics on Banking and Finance may guide us promote ant inflationary, stable and equitable system for economic growth. Islamic Banking is the most needed mechanism at this time which could solve the problems. The fear that Islamic banking would not benefit the corporate or nationalized bankers is just based on prejudice only. The corporate and national bankers along with stock market would be in better position after introduction of Islamic Banking. Islamic Banking would also increase D mat account and capitalization at stock market. Hopefully AMU with attempt to promote education about Islamic Banking and Finance may improve our understanding about the alternative banking and financial mechanism. Islam advocates for anti inflationary and stable economic system with socio-economic justice as an objective of governance.
Syed Zahid Ahmad
Posted by: Syed Zahid Ahamd at July 30, 2008 @ 9:47 pm
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