India on road to an era of prosperity

India is has for sure embarked on an era of prosperity feels Professor T.T. RamMohan of IIM, Ahmedabad. Let us see the reasoning given by him.

India’s high growth rate is sustainable as it rests on profound structural changes.

World economic growth is projected to slow down to 3.2% in 2007 before accelerating to 3.5% in 2008.

But America’s policy towards Iran remains a key risk to the world economy. Let’s see how the Professor explains this:

1. The first half of the calendar year was depressing. America’s housing sector was slowing down sharply; oil prices were hovering around $75 a barrel; inflation and interest rates were seen headed for north; foreign investor were seen exiting the emerging markets and a hard landing of the US economy seemed immanent.
2. In the second half, the not so successful attempt by Israel of wiping out Hezbollah (the Iranian backed militia) in Lebanon had brought in a change of scene. This failed mission meant that a war in Gulf (an attack on Iran by Israel or US to wipe out its nuclear infrastructure) had been averted – at least for the time being. Therefore oil prices started declining, inflationary pressures eased and the world economy bounced back.
3. So a change in America’s policy and bombing of Iran will disrupt oil supplies and destabilize the world economy. Oil prices, thus are carrying a ‘terror premium’, reflecting the risks to the world economy of conflagration in the Gulf.

Concerns about India’s ability to sustain the growth momentum and how or why they are of no consequence:

1. Recent growth rates are entirely due to global economic boom. This implies that a global downturn could seriously affect India’s growth prospects. As India’s export/GDP ratio is around 13%, a global slowdown could only impact GDP growth by about one percentage point. That still leaves our growth rate at a healthy 7%.

2. Growth is consumption-driven and arises from a fortuitous surge in liquidity. But going by the investment intentions of the corporates as well as production and imports of capital good, it is reasonable to assume that growth is increasingly investment driven.

3. The economy is showing signs of ‘overheating’. The rise in inflation has been fuelled by shortages of agricultural products, not excess demand. Though real estate and stock prices look stretched, they do not pose any systemic risks.

NOTE: You can listen to a podcast of this article below. Click on the "listen to this article" link.