Washington: Even as the "world is entering an era of slower growth" and "deepening recession", India's economy is set to expand 5.1 per cent in 2009 and by 8.0 per cent in 2010, the World Bank forecast on Monday.
Without India and China, which too is forecast to grow 7.2 per cent followed 7.7 per cent, the developing countries output would shrink 1.6 per cent, the Bank said in its Global Development Finance 2009 report.
The immediate impact of the crisis on the South Asian economy was most apparent in financial markets, although the banking sector was relatively unscathed-given the region's minimal exposure to toxic assets and the limited presence of foreign commercial and investment banks, the report said.
Stock markets were buffeted largely in line with global equities, especially through the end of 2008. Since that time, equity markets in the region have stabilised, with some bourses posting gains as of the end of May 2009.
Stock markets in India, for example, advanced in April and May, with a surge following recent elections that boosted market sentiment and underpinned expectations of an accelerated reform program and greater openness to foreign investors, the Bank noted.
Gross capital inflows to South Asia fell by 29 per cent in 2008, among the sharpest declines posted among developing regions. In India, they were extremely subdued, down 64 per cent relative to inflows recorded during the first quarter of 2008.
Gross financial flows posted a recovery in India during April and May, as international investor confidence improved on early indications of a recovery for global growth and on expectations that the country is well-placed to benefit from an eventual turnaround. Markets have also reacted positively to the decisive election outcomes, the Bank noted.
Capital inflows, including recent record-high FDI inflows, had become a significant source of finance for the rapid rise in regional investment,particularly for corporate capital expenditures in India, and a key driver of regional GDP growth over recent years.
As a consequence, their reversal has contributed to a sharp falloff in regional investment growth, the report said.
In India, FDI inflows fell from 4.6 per cent of gross domestic investment in the third quarter of 2008 to only 0.7 per cent during the fourth quarter of the year.
On a net basis, total private and official capital flows to the region contracted by one-third in 2008 from a record-high $116.5 billion in 2007. In contrast, during 2008, net FDI inflows grew 59 per cent, coming to represent nearly two-thirds of total net inflows.
This sharp increase in net FDI inflows was driven by surges in FDI to India and Pakistan-largely accumulated prior to the onset of the crisis-which registered gains of 52 per cent and 59 per cent, respectively, the report noted.
Industrial production in India was down 2.4 per cent in March 2009 from a year earlier, while exports contracted 33 per cent.
In India, industrial activity has been generally trending downward since late 2006, recording a halving of growth to 4.4 per cent in 2008, compared with outturns of 10 per cent growth in both 2006 and 2007.
Reflecting the collapse in food and fuel prices since the recent peak in mid-2008 and falling domestic demand, regional inflationary pressures have subsided and disinflation is evident across the region.
In India, wholesale producer prices moderated sharply (reaching close to a zero annual rate in March), although consumer price inflation has proven more sticky downward (at just below 10 per cent in March).
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