India Growth to Decelerate in 2010, 2011 Industry Group Predicts

MAPI points to export dependence on U.S. and Europe as well as inflation as issues contributing to slowdown.

After 10.7% Indian manufacturing growth in fiscal year 2009, MAPI anticipates a deceleration to 8.1% growth in FY 2010 (April 2010 to March 2011) before accelerating to 8.4% growth during FY 2011.

This prediction is based on a new model that the industry group developed to forecast annual output growth in 16 major Indian manufacturing sectors.

Fourteen of 16 sectors should show growth in 2010 and 2011, including three which are expected to show double-digit gains in both years: transportation equipment and parts by 17% and 15%, respectively; machinery and equipment by 12% and 10%; and beverages and tobacco by 11% in 2010 and by 12% in 2011. One other industry, paper and paper products, is expected to post a double-digit gain in 2011, by 10%.

"After being flat in 2009, beverages and tobacco output is expected to resume the double-digit growth rate seen since 2004 as multinational beverage manufacturers continue to mine the Indian market," Waldman said.

The report notes that over the short term, the Indian economy and its manufacturing sector confront a number of challenges. While the country has diversified its export markets away from the advanced economies and toward developing Asia, almost one-third of Indian exports are still sold in the United States and the Eurozone, two regions with shaky and uncertain economic recoveries.

Additionally, India is confronting a difficult inflation problem, possibly forcing the central bank to accelerate monetary policy tightening. This creates a downside risk for economic and manufacturing growth.

"Over the longer term, India shows much promise as a manufacturing and trade power," Waldman said. "Its gross domestic savings as a share of GDP is approaching 40%, creating a strong domestic capital base to support investment-led growth which, in tandem with accelerating foreign direct investment, should support long-term industrial strength.

"As India augments its competitiveness in global goods markets, rebalances its sources of growth away from consumer spending, and makes a strong push in infrastructure improvement," he added, "its growing manufacturing strength will likely be supported, at least over the next five to 10 years, by capital goods output."

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