India strong despite recession threat

Economists are optimistic that India will continue to post strong growth, though GDP figures are expected to drop.
Despite an impending US recession, policy tightening in China, and downward revisions of Japanese growth, Goldman Sachs's economists are confident that IndiaÆs economy will weather the storm, albeit lose momentum.

Higher savings and investment, favourable demographics, rapid urbanisation and productivity gains all remain in place. The economy also has the advantage of weaker global linkages compared to other Asian countries: IndiaÆs exports are approximately 17% of GDP compared to a non-Japan Asia average of over 40%, with domestic demand playing a more important role, says the report.

Urgent infrastructure, construction and retail needs will continue to drive investment and growth. Meanwhile, financial conditions are still not excessively tight. ôThe booming stockmarket, which has increased more than 45% in 2007, and has increased five-fold since 2003, will continue to support demand through its beneficial impact on investment by lowering the cost of capital and increasing capital through wealth effects,ö says the report.

However, Goldman Sachs has revised GDP growth forecasts to 7.8% from 8% for 2009 due to a decrease in external demand, and expects export growth to halve to 9.8% as a result of rupee appreciation and a global slowdown. Software, textiles and apparel, gems and jewellery, which are key export sectors, are likely to be the most affected.

As growth slows and global rates decline, Goldman Sachs predicts the Reserve Bank of India to ease monetary policy in 2009 and 2010. The reserve bank has said that inflationary pressures from capital inflows are its top priority, a stance which Goldman Sachs believes will continue until the end of the 2008 financial year. However, the reserve bank will likely begin to lower rates in mid-2009, when core inflation remains under control and the economy moderates, with a possible 25bp cut and a further 50bp cut in 2010.

Goldman Sachs also expects the rupee to continue to appreciate against the US dollar, with its forecast as much a function of the rupeeÆs strength as of additional dollar weakness. ôWe believe IndiaÆs structural growth story, positive interest rate differential and large financing needs, especially for infrastructure, will continue to suck in capital in excess of its current account deficit.ö
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