INDIA: Behind China, India is the second fastest growing economy.
Indian investments and the Foreign Direct Investments (FDI) accounted for 39 per cent of India’s GDP in 2008, up from 25 per cent in 2003. A third of that came from FDI, but as global finances collapsed, a third to a half of FDI inflows have vanished this year.
- Like most of the world, however, India is facing testing economic times in 2008. The Reserve Bank of India had set an inflation target of 4%, but by the middle of the year it was running at 11%, the highest level seen for a decade. The rising costs of oil, food and the resources needed for India’s construction boom are all playing a part.
- As part of the fight against inflation a tighter monetary policy is expected, but this will help slow the growth of the Indian economy still further, as domestic demand will be dampened. External demand is also slowing, further adding to the downside risks.
On the other hand, India's stock market roared up almost 20% in January and the country ranks as the world's twelfth-largest economy, with a GDP topping $1 trillion.
However, the Indian stock market has fallen more than 40% in six months from its January 2008 high. $6b of foreign funds has flowed out of the country in that period, reacting both to slowing economic growth and perceptions that the market was over-valued.
Inflation continues to pose a threat. Inflation peaked at 12% in early August ‘08. Inflation is being caused not only by rapid growth (demand pull factors) but, also the cost push inflation factors (rising oil prices). Hopefully, the fall in oil prices and higher interest rates will reduce inflation without causing too much of a slowdown.
Economic Growth After reaching growth of 9.8% in 2007/08, growth is expected to slow down to 7%. This might not be a bad thing as it will avoid inflationary pressures building further. However, some worry the global credit crunch could reduce growth much more.
Global Recession and Indian Economy It appears that Europe, Japan and the US are entering into recession. Falling house prices, crisis in the financial system and lower confidence could lead to a sharp downturn, with the worst still to come.
Many argue that India’s growth is not so dependent on growth in the West. However, the Indian stock markets have been hit by the global crisis. India’s growing service sector and manufacturing sector would be adversely impacted by a global downturn.
