Page last updated at 08:58 GMT, Monday, 3 November 2008

Indian economy shows signs of slowdown

By Neil Heathcote
BBC News, India

Diamond cutter Subhash
Subhash is having to return to farming

Subhash is going home.

Three years ago he moved from his village to the city of Surat in Gujarat. There he found work as a diamond cutter.

But demand for luxury goods has slumped in the West, and now there's no longer enough work.

"Financial conditions aren't very good back home," he says, "but because of the market slowdown, I'm not earning enough here.

"So now I'm going back to the village to do farming."

Thousands of others like him - from glass blowers to leather workers - have found that their skills are no longer needed. The West is no longer buying.

Exporters are at the sharp end of India's slowdown. Some are making good money thanks to the falling rupee - which makes their prices competitive overseas.

But others are closing down their operations as orders fall.

'Some setbacks'

"There will be ups and downs, especially in the export trade," admits Finance Minister, Palaniappa Chidambaram. "One has to take the good and the bad in one's stride.

Finance Minister Palaniappa Chidambaram
I don't think it is right to say that jobs are being destroyed in this country
Palaniappa Chidambaram

"There may be some setback in volumes. But surely you can make up for it by widening your basket of goods, by going to different destinations, by getting a better price for quality?

"There are a number of ways exporters can make up for the so-called setbacks."

The government is at the centre of the battle over how the performance of the Indian economy should be seen.

Is the economy undergoing a mild slowdown, to a still robust 7 or 8% growth? Or is it experiencing the end of the boom years, with inflation high and jobs being lost?

The answer depends to a great extent on what happens in the West in the weeks ahead.

Election pressure

Months of stock market declines have killed the theory that India is insulated from the problems of the global economy.

Central bank governor Duvvuri Subbarao
The central bank boss says calm has returned to India's financial markets

The government now has to counter headlines of broker suicides and blue chip stocks that cost less than a burger.

Jobs are a particularly sensitive issue. The next general election is just months away.

The most high-profile lay-offs, by Jet Airways, were retracted within two days.

The Civil Aviation Minister claimed the credit for persuading the company to reconsider.

Last week, the industry body Assocham (The Associated Chambers of Commerce and Industry in India) forecast heavy job loses in the days ahead.

It withdrew the report two days later, after the finance minister publicly disputed the notion that jobs are being lost.

"l don't think it's right to say that jobs are being destroyed in this country," says Mr Chidambaram.

"It's the pace of creation of jobs which has slowed down…an economy in recession destroys jobs - an economy growing at 7% does not."

In public, company heads echo his optimism.

"They are worried, they are concerned, but they are confident also," says the head of the Indian Merchants' Chamber, M N Chaini.

The worry stems from uncertainty.

Lending problems

In these unprecedented times, even the head of the Reserve Bank admits he has difficulty figuring out what will happen next.

India's financial sector has had little exposure to the toxic loans that sparked the credit crisis in the West. But even so, its banks have become reluctant to lend money.

Over the weekend, the Reserve Bank of India was forced to take action yet again to spur lending, after companies complained that banks weren't putting up any money for their projects.

The lack of credit is forcing firms to cut back their expansion plans. Even companies building the roads and tunnels that the country needs for its future growth are having to trim their ambitions.

"Right now, I don't think banks are ready to lend to large infrastructure projects," says Rupen Patel of tunnelling specialist Patel Engineering.

"A lot of projects we're not even bidding for, because the financial scenario is very uncertain."

Policy makers feel the problems won't really end, until they end in the west as well.

"You tell me - is the worst over in the US? I don't know," says the finance minister.

"But if the worst is over there, then I suppose we can conclude that the worst is over here."

"There is some semblance of calm returning," says Duvvuri Subbarao, governor of the central bank. "The problem moving forward is more about the recession."

The governor has just cut his growth forecast for this year - and if things get worse in the West, he admits he may have to do so again.

But for all the talk of recession, no one is actually expecting India's economy to shrink. Few economists think the country's growth will be under 7% this year.

For the troubled states of the West, that's a level of expansion that most no longer even dream of.

Print Sponsor

India: Boom what boom?
20 Oct 08 |  Business
India's central bank cuts rates
20 Oct 08 |  Business
Jet Airways lays off 800 staff
15 Oct 08 |  South Asia
India state elections announced
14 Oct 08 |  South Asia

The BBC is not responsible for the content of external internet sites

Has China's housing bubble burst?
How the world's oldest clove tree defied an empire
Why Royal Ballet principal Sergei Polunin quit


Americas Africa Europe Middle East South Asia Asia Pacific