Analysts see moderation in economic growth

NEW DELHI: A soft-landing of the economy seems to be materialising with various indicators like industrial production, export growth, auto sales, cement dispatches and corporate revenue growth pointing to moderation in the overall growth trend, says Morgan Stanley.

With the lagged effect of a relatively tight monetary policy and weaker external demand, it expects GDP growth to slow down to 7.4 % in 2008 from 8.8 % in 2007.

The earliest indicator to reflect the slowdown has been automobile sales growth. Growth in all three segments— passenger, two wheelers and commercial vehicles—has decelerated significantly.

Two-wheeler sales growth has been declining on a year-on-year basis for the past nine months, while commercial vehicles and passenger car sales has dipped to single-digit levels in December 2007.

Bank credit growth has retraced almost one-third from the peak. The growth in bank credit has moderated to 22.2% as of fortnight ended December 21, 2007 from 27.6% as of end-March 2007 and 30.1% in December 2006. Anecdotal evidence from commercial banks suggests the slowdown in bank credit is largely due to slower retail loan growth.

Corporate loan demand related to capex is still very strong. Assuming the current sequential trend in credit growth is maintained, the overall bank credit is likely to decelerate further over the next few months, says Morgan Stanley. The combined impact of weakening domestic demand has already been reflected in the deceleration in consumer goods growth.

Export growth in rupee terms slowed to 11.5% in November 2007 compared to 33.2% registered in the same period last year, reflecting the slower growth in US, stretched domestic capacity utilisation in select sectors and weakening competitiveness because of the rupee’s appreciation.

Overheating concerns are reducing and property purchase transactions have also declined significantly with some pockets already witnessing a decline in prices. The RBI has managed to slow the credit flow to housing and consumption with its policy measures. While consumption spending has moderated, investment growth has remained strong.

The interest rate sensitive segments, such as auto and consumer durables, have reported a weak trend over the last two quarters. However, growth in capital goods has remained steady at high levels.

According to Merrill Lynch, industrial growth will soften to about 8% during December 2007-March 2008 from 9.2% during April-December 2007. This reflects base effects of double-digit growth last year and a tighter interest rate regime and a stronger rupee.

The dip in the November IIP figures largely reflected the base effects. Consumer goods production is surely softening while capital goods continue to do well.