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Growth Cycle – At CrossRoads

May 26, 2008

India’s Economic Growth story can be grouped into three phases. (1) Prolonged below-trend growth period – 1998 to 2003. (2) Acceleration to Overheating Zone – 2004 to 2007; (3) Reverting to sustainable growth rate. We believe the underlying sustainable growth rate currently is 7.5-8% – the level at which the risk of overheating is low.

Just as during 2005-2007 strong positive global factors supported India’s growth above its then sustainable growth trend, negative global factors are now threatening to pull its growth below potential. Rise in prices of Global Commodities and continued aversion of global financial markets will act against India’s interests.

For an emerging economy like India with a rising working population and large unemployed work force, limitations to potential growth are determined by the pace of reform to the economic environment, which allows resources to operate productively. Although the Government claims that economy will grow upwards of 9%, we feel it is just an eyewash as rising Inflation and Cartelisation across Iron & Steel, Cement, Real Estate will hurt the growth story badly in the short to medium term.

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