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Plan panel's guessing game?

Sep 2, 2009

India's 11th five-year plan came up for a mid-term appraisal and the preview of the same was presented by the planning commission yesterday. It observed that after growing at a scorching rate of more than 9% in FY07 and FY08, the economy slowed down to 6.7% in FY09 and is likely to slow down further to 6.3% in the current fiscal (FY10). In fact, if one were to take a worst case scenario, the growth could even come down to below 6% for the first time in quite a few years and stand at 5.5%. However, even the plan panel conceded that any projection of the growth in the current fiscal would be vulnerable to a revision as there aren't enough data points to rely upon and a real picture will emerge a little later in the year.It has to be noted that the projection of 6.3% is based on an assumption that the agricultural growth in the country would fall by 2.5% and if the fall happens to be in the region of 6%, a worst case scenario as per the commission, then India's GDP growth would be reduced to 5.5%.

With economic growth expected to be 8% in FY11 and 9% in FY12, it looks like we will end the 11th plan with an average annual growth of 7.8%, a far cry from the target of 9%. In fact, until India does something to move huge swathe of her population out of agriculture and into other fields like manufacturing and services, our stated objective of 9% growth will continue to be at the mercy of rain gods.

Is this the second wave that the US dreads?
This could well turn out to be the second wave of destruction that could once again put the US financial system in trouble and the economic recovery at some serious risk. As per The New York Times, the US commercial real estate market is not in the best of health currently, with vacancy declines and rate increases already mirroring the devastating real estate crash of the 1990s. It is estimated that US banks are holding a total of US$ 1,300 bn in commercial mortgages and US$ 536 bn in construction and development loans.

Hence, if loans start turning non-performing at an alarming rate, write offs will have to made, eroding banks' capital, thus not only forcing them to cut back on lending in other areas but perhaps also raise new capital. Although the situation has not gone out of hand right now, it is not likely to ease any time soon either with the demand remaining weak on account of the high rate of unemployment, which in turn will curtail demand for commercial real estate. Clearly, looks like there isn't just one cockroach in the kitchen for the US economy.

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