Price Hike Among Commodities Makes India's Growth Story Suffer

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The country's economy grew by 7.8% in the first quarter compared with the same period last year, the latest government figures showed. For the financial year to March, the economy grew by 8.5%, lower than the government's forecast of 8.6%.

India is one of the fastest-growing economies in the world, but has been hit hard by rising consumer prices. Analysts say a surge in prices of essential commodities, coupled with measures to cool the economy, has started to take a toll on growth. The central bank has increased interest rates nine times in 15 months. The last rise on 3 May boosted the benchmark interest rate by 50 basis points to 7.25%

Losing momentum

India's economy has posted robust growth since the global financial crisis. However, the Reserve Bank of India's monetary tightening policies have seen a loss of momentum. Analysts say that as the central bank continues its fight against rising prices, the pace of growth is likely to be slow for some time.

However, analysts warned that though a slowdown in growth had been broadly expected, continued loss of momentum would have an adverse effect on the economy. "It is significant because it is the first quarter of sub-8% growth since the crisis," said Sonal Verma of Nomura. "The last four quarters we have been growing above 8%, so this is really a slow starting point for the next financial year," she added.

The Indian government had set an economic growth target of 9% for this fiscal year. However, in May Finance Minister Pranab Mukherjee admitted that India could miss that goal because of high inflation and rising commodity prices. "When you look at India, it is perhaps going through a slight soft patch," said Mr Wood.

"Most countries would be delighted with the growth numbers India is recording, but it's lower than government growth targets." Mr Wood added that while India's had grown robustly compared to developed economies, compared with China, it was lagging behind. China's economy expanded 9.7% in the first three months of this year compared with the same period the year before. "They would love to emulate China's growth, but we don't think they are there yet," said Mr Wood.

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Corporate China and India Inc. have also jumped into the fray

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While China has till now adopted a largely heavy industries led investment approach in Africa, India’s approach is more entrepreneur and brand led. No doubt this once again pops up the debate of one’s superiority over the other. “One doesn’t have a choice in these matters. Certain business ecologies already exist in certain regions of the world and it is from that position of strength that entrepreneurs are able to venture into new markets and seek new partnerships or business opportunities,” Sood tells 4Ps B&M.

In as much, Africa is fast becoming the testing ground for India Inc.’s ‘brand’ battle with corporate China. According to the Emerging Economy Report by CKS, “Indian companies will have a far more prominent role in Africa’s economic development than China, even though China has been a far more aggressive investor into Africa over the past decade.” Certainly, Indian industry is itself a private sector driven industry and this is what drives the Indian economy. The private sector moves where it sees opportunity and this instinct is what gives Indian brands an upper hand. “Anyone who has lived in both India and China will agree that the Chinese have been far more successful at creating mass urban and cross-country infrastructure. On the other hand, just having quality infrastructure is not enough for Africa - the continent needs jobs, and that’s something Indian service sector companies can provide,” says Sood.

But there are many who reject the avowal. “I don’t think there is any question of a ‘brand war’. There are so many unexploited opportunities in Africa and believe me, both Indian and Chinese companies can co-exist,” avers Thatty of Bank of Baroda. But in reality, the Indian brand building prowess is fast becoming a major plus for Indian biz in Africa. Agrees Sood, “Indian corporate and consumer culture is almost a generation ahead of China in terms of understanding how to participate in branding relationships.”

Analysts shun comparisons, believing that the question should not be what is going to help India or China, but what is going to help develop African countries better and faster! But it is a fact that today comparatively speaking China has a far better investment record in Africa than India does. In fact, till a few years ago, Indian companies were not prepared to take risks in the low credit rating African markets. China scored better largely because of its state-led investment climate. But with their new found zeal Indian entrepreneurs may yet top that score card. What’s more, critics say that China is more restricted to the B2B model in Africa as the perception about Chinese products is comparatively lower than Made-in-India stuff. While the West has already encountered under-quality Chinese goods, it’s now Africans who talk of “zing zong” products - by which Zimbabweans mean products that ‘break easily’.

Which is not to say that India and China are going head to head around the world. In fact, it may never come to such a pass. But for now, India has an upper hand so far as front-end or consumer oriented businesses go, while China is strong in manufacturing and infrastructure development. If China’s over-arching presence in the oil and mineral rich northern Africa is a reality, then the fact that Indian brands are driving the more metropolitan regions of the continent crazy. Hope you’ve not forgotten the mom and her three kids in that Lilliput store in Cairo?

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Source : IIPM Editorial, 2008

An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).

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