Wednesday, April 15, 2009


The International Monetary Fund foresees the world economy contracting by 1% in 2009. It has forecasts a gradual recovery in 2010. The US economy has shrunk by 6.3% in the last quarter of 2008 and the pain is still persisting in the 1st quarter of 2009. The European Union has committed more than US Dollar 1.5 trillion investments in the banking system and has pledged to spend Euro 200 billion to lift their economy. The US is spending $ 787 billion to revive its economy. G-20 Summit, a meeting of leaders of worlds’ 20 biggest economies has announced a clutch of big ticket stimulus measures. G-20 leaders agreed to pump in $ 1.1 trillion of extra financing to support IMF and lubricate world trade by providing “oxygen of confidence”. The G-20 committed $ 250 billion finance to ensure trade flow. IMF resources will support the countries in financial distress. The Indian economy on the other hand is expecting a slow down in growth in 2008-09 between 6% to 7%. According to RBI Governor, B. Subbarao, the next fiscal (2009-10) will be more challenging. Montek Singh Ahluwalia, Deputy Chairman, Planning Commission, also projected further reduction in growth in 2009-10. K.V. Kamath, ICICI MD and CEO expects 7 to 8% growth during 2009-10.Despite varying opinions on growth rate, there seems to be unanimity on positive growth rate in Indian economy higher than the world average. The index of industrial production (IIP) has dipped about 1.2 % in February, 2009, although the off-take in cement and steel sectors has significantly improved during last 2 months. The prices have also firmed up due to high demand of cement and steel and increased expenditure on infrastructure projects. The capital market has also reflected a recovery of 10% to 15% in major equity scrips. The financial stimulus provided by the Government of India, by release of about Rs.3 lakh crores through CRR and SLR cut, has not provided the much needed liquidity to the banking system, in view of an almost equal increase in government borrowings from banks especially at high rates. The government may not be able to provide any major relief to the banking system by providing additional liquidity for next 6 to 8 weeks, in view of the Lok Sabha Election.

It is expected that the Indian economy will stage a smarter recovery during July 2009 – March 2010 in view of –

  • Inflation being at its lowest ebb of near 0% (wholesale price index).
  • The fiscal deficit for 2008-09 is expected to increase from the budgeted figure of 3% to more than 6%, thereby providing necessary push in the government expenditure. This trend is expected to gain further momentum in the coming month, in view of lower risk of inflation.
  • The agricultural production has been quite encouraging in the current fiscal.
  • The lending rates by banks are expected to reduce by about 2% to 4% by March, 2010, thereby providing much needed push to the Indian economy, industrial sector as well as to the real estate sector.
  • The lending rate to housing sector is also expected to reduce by about 1% to 2% during this period.

All the aforesaid sectors could be supported by some recovery signs in the US and European markets, although the real recovery is expected to be fairly slow in these markets. China, India and Brazil are expected to lead the recovery, supported by Russia. The real estate sector in India is facing its difficult time as most of the projects are facing a big cash flow and liquidity crunch. In the industrial and services sector, the sentiments are also still not upbeat and are expected to recover and become positive in the 2nd half of 2009 and more strong in the 1st quarter of 2010. The real estate recovery will depend on the availability of cheaper finance through institutional and banking mechanism. A 
policy push is needed from the Government in this sector. We, the Chartered Accountants community, need to prepare our clients to tighten their belt, be more cost effective and help them in identifying areas of waste reduction and also at the same time bring out new innovative projects at highly competitive prices in the national and international markets. Optimum utilisation of resources through inventive processes are must not only for SMEs but also for large industry segment. This
is the time to plan and implement new projects so that the benefits can be reaped in 2010-11 and
there after leading to a strong economic recovery, the signs of which are clearly evident.


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