India’s 7% growth rate?

Even though the International Monetary Fund (IMF) is predicting a global recession in 2009, India’s growth rate is expected to be at 7% . In a world where most economies will shrink or grow marginally, 7% is a stunning growth rate. However, is this a realistic prediction? There are a host of factors that could derail India’s growth in 2009.

Consumers: The biggest risk to India’s growth comes from the consumers! The Indian consumers, till a couple of decades back, primarily believed in saving money and living within their means. But as the Indian economy opened up, the Indian consumer started spending more. Consequently the economy benefited. Credit card off-take increased, malls and multiplexes came up everywhere, and spending began in right earnest. Just when it seemed like this would never end, the global economic crisis began. This has led to a fear of job losses and uncertainly, leading to a fall in consumer demand.

Housing: A house is the single biggest purchase for most middle class Indians. Housing also drives a host of other industries and products like, paints, consumer durables, furniture, etc. Also, when the house price goes up, people ‘feel’ rich and end up spending more. With many houses bought in 2007 and 2008 now quoting below their purchase price, consumers in India are learning the hard way that property prices can actually go down!

The key reason why India was supposed to do well, despite the global gloom, was that the Indian economy is driven by internal consumption. But the biggest risk now is that the Indian consumer, who had just started to spend, may cut back on spending and start to save more. If this continues for a long period of time, it could potentially lead to deflation .

Businesses: Many Indian businesses have also been guilty of borrowing heavily when the times were good, and are clearly under-prepared for this downturn.

Government: The government has been slow to react to the global financial crisis. Till some time back the government was still fighting inflation, by keeping interest rates high, when there was a clear case to reduce rates to boost growth. The two stimulus packages were too little too late to help the economy in any meaningful way.

Elections and Monsoon: The two jokers in the pack are elections and monsoon. A government with Left’s support or an inadequate monsoon could be the last thing the Indian economy needs in 2009.

Given all these factors, it will be very difficult for India to maintain a 7% growth rate in 2009. The growth rate could actually go down to as low as 4%-5% over the next few quarters. Lets hope the Indian consumer keeps spending...




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This post presents a point of view which differs from conventional wisdom. Apart from being a good read (hopefully), it can be a good starting point to help readers, preparing for CAT (IIM) or other MBA interviews, think differently. Since the data / facts for these posts are derived from a host of sources and websites, readers are advised to cross-check the authenticity before using them anywhere.