Nothing fazes the Indian economy!

The RBI's latest macroeconomic review forecasts GDP growth in 2007-08 of 8.5%. This will be on top of average growth of 8.5% over the past four years. The slowing down over last year's growth of 9.2% couldn't be more modest. This will happen against the background of several adverse factors:

• A deceleration in the US economy
• Rising interest rates
• Rupee appreciation

How come nothing seems to faze the economy? Consider the above factors a little more closely.

1. US economy: Yes, it is slowing down but that is not having much of an impact on the world economy as yet. According to the IMF, the global economy will slow down only by 50 basis points to 4.9% this year despite a deceleration in the US. Why? Because the factors slowing the US economy are US-specific, especially a slump in the housing market. The US slowdown is not the result of factors that impinge on the world at large.
2. Rising interest rates: Nominal interest rates have risen in India. But, as I argue in my latest ET column, real interest rates are below those obtained in the second half of the nineties when rising interest rates put the brakes on the Indian economy.
3. Rupee appreciation: This is not having much of an impact on the economy thanks to improved productivity. Improved productivity in firms itself is the result of several factors: cheaper imports, increases in scale of operations, downsizing of the workforce, lower interest rates. Merchandise export growh did slow down in 2006-07 but not as much as feared in the wake of rupee appreciation. Growth in April -February 2007 was 19.35, slower than the growth of 26.3% in the same period in 2006-07. But we must look at merchanidse exports as well as software exports. Net surplus in software grew by a healthy 29.1% despite rupee appreciation. Margins may be lower but this is offet by rising volume thanks to increased off-shoring.

So what if the US economy slows down? Merchandise exports may be hit but not software. Lower demand from the US for merchandise exports is offset to some extent by demand from Europe. And slower exports as a whole are compensated for by larger domestic demand. Nothing fazes the Indian economy!

Read my latest ET column on the subject.