CMIE puts India’s Economic Growth Above 9% Despite Dismal Expectations

The Centre for Monitoring Indian Economy (CMIE) has kept its outlook high for the Indian economy in its monthly report despite dismal expectations. It expects the economy to grow at a robust 9.4% in FY09, marginally lower than its earlier projections of 9.5% in June, but higher than the prediction of 9.1% in February. This marginal change is because of a downward revision in its estimate of the growth of the industrial sector. CMIE had earlier predicted a growth of 11.4% in industry. However, following a slowdown in the output of a few industries, it now believes that the industrial sector would grow by 11.1%.

CMIE growth projection is in sharp contrast with the economic forecast made by Reserve Bank of Indian (RBI) and the Economic Advisory Council of the Prime Minister. CMIE report has denounced the downcast projections by both of them. The RBI had predicted 8-8.5% real GDP growth but, it later brought it down to about 8%, while the Economic Advisory Council of the Prime Minister, on the other hand, projected the economic growth at 7.7%.

CMIE’s relatively upbeat forecast is based on disregarding two observations made by other forecasters. Firstly, it considers the Index of Industrial Production (IIP) to be faulty and does not regard its sharp slowdown in the first quarter of FY09 to be a reflection of the reality. It said that while some prominent industries like cement, sugar, glassware and milk powder may witness a slowdown, the investment climate in the country has generally been good. And secondly, it does not think that inflation is extraordinarily high so as to hurt growth. It believes that the Wholesale Price Index (WPI) is an inappropriate measure of inflation and the Consumer Price Index (CPI), a more appropriate measure, has seen a less vicious rise.

IIP Down but Employment still to Grow?

The latest industrial production data painted a gloomy picture on the growth of industrial production as IIP for the Q1 2008-09 fell to 5.2% (y-o-y). almost everyone is predicting contraction of industrial activity and slowdown in economic growth. However, the recent KPMG survey on business outlook shows as different picture. The survey showed that the manufacturers were expecting business activity, capacity utilisation and employment to rise. In fact, India was shown as the country with second biggest expectation of employment generation, much above China but below Brazil.

In India, around 50% enterprises were optimistic about adding new workforce to expand their business presence. This survey is in sharp contrast with the just released IIP figures, which were less optimistic and hinted in slowdown of industrial activity in future.