India Outlook 2009

In India, the official line is "cautious optimism." In December, the government reported that economic growth in the first half of the current fiscal year (April-September 2008) was 7.8%, a strong showing in a global economic slump.

The government projects full-year growth at 7%, but expects to fall short of fiscal and revenue deficit targets this year mainly because of stimulus measures that could total up to 2% of the nation's $1.2 trillion gross domestic product.

The fiscal deficit may jump to 5% of GDP compared to the targeted 3%, according to the government. Overall, however, officials say the economy should not be hard hit because services and agriculture account for 55% and 18.5% of GDP respectively, and these sectors are less affected by cyclical downturns.

The official optimism is not fully echoed in other circles. Japan-based Nomura Securities puts India's current growth at 6.8% and predicts a decline to 5.3% for 2009-2010. Rajiv Kumar, director and chief executive of Delhi-based think tank Indian Council for Research on International Economic Relations (ICRIER), sees it going as low as 3.9%--or even lower--in the first half of the fiscal year.

Other indicators also point to hard times for India, where in recent years the economy was soaring. Industrial output fell 0.4% in October, marking the first decline in 15 years, and exports were down 12%, the first decline since 2003. Excise duty collections plunged 15% in November.
The bright spot in the Indian economy is inflation, which dropped to nine-month lows of about 6.6% in December. HDFC Bank (nyse: HDB - news - people ) chief economist Abheek Barua expects inflation to drop sharply to below 2% by March due to the declines in prices for manufactured goods and commodities. A. Vinay Kumar, a professor of finance at the Indian Institute of Management in Lucknow (IIML), says the easing of inflation is "the most heartening story of all."

Hari Rajagopalachari, executive director at PricewaterhouseCoopers, has a different view. "Inflation is going to be high because of the injection of huge amounts of cash into the economy through monetary policies," he says. "India is largely a supply-constrained economy. Putting more demand into the economy does not necessarily mean that there will be an equal supply of products or services."

Rajesh Chakrabarti, a professor of finance at the Hyderabad-based Indian School of Business (ISB), expects Indian corporate performance to suffer. "The government stimulus will help the situation a bit, but it is unavoidable that profits will fall and margins will decline. At the same time, we should not expect large losses for most of the major companies. They will maintain profitability though it will not be as good as in the past."

Exports--where much damage has already taken place--will continue to suffer. "Nothing is going to improve before 2010-11 because the whole global situation is going to remain depressed all through 2009," says Chakrabarti. Adds Kumar: "The export sector is not in good shape because of the volatility in the exchange rate. The rupee depreciation is a respite, but greater volatility is a matter of concern."

The rupee depreciation is unlikely to be India's saving grace much longer; experts expect its value to return to around 40 to the dollar, down from more than 50 in recent months. Kumar predicts the rupee will be around 40 or 42 to the dollar in 2009.

Chakrabarti says the dollar has appreciated against almost every currency in the world as worried investors seek safety in U.S. Treasury bonds. "Once people think that the crisis is over, there will be a reversal. This may bring down the dollar a little bit and the rupee may appreciate to around 45 or so. I don't see the rupee falling much further than where it is now."
The Sensex--the Bombay Stock Exchange Sensitive Index--may increase slightly in the coming year. "The market is expected to be flat, between 9,500 and 10,500, and could even come down below the 9,000 mark before the general elections" due in the next few months, says Kumar.
Chakrabarti predicts the market will move sideways. "While the Sensex may go up slightly, I don't see any sustained rise. If we manage to reach 12,000 by December 2009, it means we are doing wonderfully well."