It is not official, not as yet. But there are plenty of early signals pointing to the uncomfortable fact that Indian economy is heading for a slowdown, which can end in a prolonged recession. Well, neither the policy makers nor the economic think tanks have raised the alarm bell, but the nagging feeling of an economic slowdown is getting stronger by the day.

Just consider a few of the early pointers. Growth rate in country’s industrial production during April to January (10 months) of last financial year was down to 8.7 per cent against 11.2 per cent in the same period last year. The latest data shows that in the month of January 2008 industrial production went up by 5.3 per cent against 11.6 per cent in the same month last year. Worse, six core sector industries like coal, cement, steel, power, etc, posted lower growth rate of 5.6 per cent in the 11 months period (April-February) of last fiscal, against 8.7 per cent in the same period last year. 

What is more alarming is that the growth in capital goods industry has dropped to 2.1 per cent in January 2008 against 16.3 per cent in same month last year. Since demand for capital goods is a strong indication of capital formation in an economy, the drop signifies that downstream industries (who use capital goods for production) is expecting slower future growth.

Consumers in general seem to have become a bit guarded in their spending as consumer durable industry has witnessed a negative growth of three per cent. It implies that people are spending less in home appliances, clothes and consumer electronics, etc.

Clear indication
Although it is too early to say that the entire economy is on a downturn, there are many specific sectors that have been hit. Anticipating a slower demand for their work from USA, which is in the middle of a financial crisis, companies in the information technology industry have lowered their intake of fresh employees. The domestic IT biggies like TCS, Infosys, Wipro, Satyam, HCL etc, have reduced fresh recruitment by half. They are now utilising more reserve employees from the bench than before. Some captive IT units of US and Europe based companies have even fired the entire team working on a specific project. Similarly, many BPO companies catering to US financial sector clients are now faced with lower billing rates leading to reduced margin.

Slowdown is also visible in the hotel industry as star hotels in major metros are witnessing 20 per cent lower occupancy now compared to same time last year. Business travelling from abroad and within the country have comedown by a third, said a source in a five star hotel in Bangalore. Similarly, sandwiched between overcapacity and galloping cost, all players in domestic aviation industry are bleeding cash. The total loss for the industry in the last financial year was estimated at about Rs 3,000 crore. The real estate industry in the country, which raked in money in the last three years from the skyrocketing prices, is suddenly finding that there are few takers for properties. Faced with low demand prices of residential and commercial properties in all large cities are down almost 20 per cent.  

The slowdown in industrial activities has taken its toll on transportation business and truck operators in the country bought 2,37,278 medium and heavy commercial vehicles in April to February period last fiscal, 5 per cent lower than what they bought in the same period last year. Though the sales of cars have grown 11 per cent in the same period, it was mainly due to heavy discounts offered by large players. In fact, of the 11 players five witnessed drop in sales, while others saw moderate growth. Sales of motorbikes, however, was down 13 per cent in 2007-08.

Subprime crisis
There are several reasons as to why we are heading for a slowdown. But it seems that the brakes were applied too suddenly, as till December last year things looked fine. Then came the realisation of the huge impact of US subprime crisis which is now a fully blown catastrophe. The subprime crisis or the mortgage crisis, is actually the result of a financial adventurism where borrowers with lower creditworthiness were given generous housing loans by banks at a rate of interest higher than the prime rates. To expand the market further, these loan portfolios were sold again to other investors like private equity funds, hedge funds and non-banking finance companies through securitisation. But the artificial boom created with easy money went bust as borrowers started de-faulting and property prices crashed leading to further defaults and price crash. As the mortgage crisis has engulfed the entire financial system in the US and a part of Europe, large financial entities like American Express, Citi Bank, Morgan Stanly, UBS, Bear Sterns etc had to write off large loans. The total loss to the industry so far is estimated at around $600 billion and the figure is still growing. Unemployment is rising as 170,000 people have already lost  jobs in the first 3 months of 2008.

Stocks tumble
When the world’s largest economy (US) becomes sick, others start sneezing. All emerging countries like Brazil, Mexico, Russia, China are affected by the US recession and India is no exception. Even stronger economies like Hong Kong, Taiwan, South Korea and Japan are feeling the heat as stock prices all over the world has tumbled.
In India the stock market went on a tail spin since the first week of January, 2008 as the Bombay Stock Exchange’s Sensex dropped to around 15,300 on April 4, 2008 a loss of close to 6,000 points from the peak. One of the major reasons behind the crash is that the foreign institutional investors (FIIs) are pulling out of the Indian market after losing money in US subprime debacle.

After suffering heavy losses retail investors have withdrawn from the market. For companies who wanted to raise funds through issue of shares this was bad news. It is estimated that nearly Rs 35,000 crore worth of public issue of shares is now on hold.

Another reason why the slowdown could be prolonged is that the high interest cost is forcing corporates to reduce borrowing and investments. As against the interest cost of two to four per cent in the US and in Europe, companies in India pay between 12 and 16 per cent for borrowing funds from banks.

To control inflation the Reserve Bank of India’s ‘dear money’ policy has kept interest rates high and restricted liquidity. But this has taken a toll on business as latest data show that the growth of non-food credit during April-February period has dropped to 22 per cent from 30 per cent in the same period last year.

Difficult time
Money is unlikely to become cheaper as the spurt in inflation will force the RBI to continue with tight monetary policy. It is now feared that many large infrastructure projects will slow their pace of work in the hope of cheaper money. This means, the manufacturing sector will slowdown further leading to job cuts.

There is very little the government can do. Its finances are already stretched because of large commitments for farm loan waivers and hiked salaries for government employees and army. Crude oil prices are at record levels and shortage of food is putting pressure on prices.

In a pre-election year the government’s priority will be fighting inflation, even if it is at the cost of sacrificing economic growth.