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India's Runaway Economic Growth Expected to Slow Down Marginally

  • Anjana Pasricha

In India, questions are being raised over how a possible economic downturn in the United States will impact India's fast-growing economy. As Anjana Pasricha reports from New Delhi, India's economy is expected to slow down slightly, but continue to grow at a healthy pace in the coming year.

Four years ago, retired army officer, Rakesh Dhir, invested a large chunk of his savings in the Indian stock market.

His investments multiplied rapidly as the market grew by an average of more than 40 per cent a year, prompting him to put more money into stocks.

Dhir, like millions of other middle class investors, was optimistic that the stock market would continue to flourish in an economy that has been growing at a rate of more than eight percent since 2003.

But in January, the Mumbai stock index, the Sensex, plunged along with other Asian markets, amid fears of a global economic downturn sparked by a possible recession in the United States. In the weeks since, stunned investors have seen the Sensex lose more than 20 per cent from its peak earlier this year.

The stock market's volatility has triggered concerns among people like Dhir about how hard India will be hit by a potential slowdown in the West.

"Hearing stories about recession in the West, I keep wondering whether I should stay invested in the stock market or not. It keeps me awake nights," said Dhir.

Economists are trying to calm such fears. Saumitra Chaudhuri, is a member of the Economic Advisory Council to the Prime Minister. He says a potential U.S. recession will have only a moderate impact on economic growth in India.

"There will be some impact, however the direct impact from a United States slowdown is not very large, because the bulk of the Indian economy still caters to meeting domestic demand, not export demand," he said.

India's domestic demand comes from its 50 million-strong middle class. Their growing incomes have fueled purchases of automobiles, mobile phones and homes, and contributed to rapid businesses growth.

However, economists warn that consumer demand will not be as buoyant as it was in previous years - primarily because rising inflation in the past year has prompted the government to raise interest rates.

Chaudhuri warns that more expensive credit could mean less spending.

"Prices of all kinds of goods, particularly food and commodities are going through the roof," he said. "When you have a very high inflationary situation, inflationary pressure, it is likely that the action you might take to reduce that inflationary potential from being realized would actually slow the economy down a bit more."

The government says it expects the economy to expand at 8.7 per cent in the coming year, compared to 9.6 per cent a year ago.

For investors looking for clues about the stock market, the decrease may be disheartening. But India is still expected to rank among the world's fastest growing economies.