In times of slowdown, companies need to cut prices and focus on areas where the demand is. International demand growth will be lacklustre at best and likely to be negative. The slowdown will get worse if firms do not respond – and that is where the uncertainty in forecasting comes from.

Despite large uncleared inventories, and missing buyers, the real-estate sector has not really reduced its prices (minor 5 to 10% cuts from astronomical peaks of the past will not do). At the same time it is reeling under a severe credit crunch. This crunch is then being transferred in many different ways to the upstream manufacturing and service sector suppliers. Merely easing liquidity will have little impact on the real-estate/construction sectors.

Yes, it is better to take a hit and move-on rather than make a profit on every single sale. If prices do not respond to changing conditions, markets are not working properly, one way or another the government will need to step in.

If the government responds as most corporate sector economists want it to – increase expenditures and reduce interest rates – sure we may go back to high growth for a while. But that would be a very short term solution. This downturn is a signal to (generally large) firms, that all is not well with their decision-making and growth strategies. Whatever the government does, it should not distort this critical signal.

The vote-on-account is due on the 16th of Februrary 2009. It is expected that further tax breaks will be given. If the past is any indication, these breaks will be very sector specific. Construction, IT sector, automobile, chemicals, textiles, financial, etc. These sector specific stimuli have to be thrown in the trash can. If tax breaks have to be given, give it to everyone. Reduce service tax for everyone, reduce income tax, reduce VAT. But do not give sector specific advantages as they are highly distortionary.

Yet the news is not all bad. The ABN-AMRO PMI survey (which we find a better indicator than the government’s own IIP index) has shown a small rebound in prodution worldwide in January. More interestingly, Indian manufacturing has been the least hit out of all countries surveyed.

For the year ahead, the RBI survey of professional forecasters shows a wide range – minimum of 3.9% and a maximum of 8%. While our forecasts are more in the 7% growth zone for the year ahead, the 4% forecast is very much in the domain of the possible. A drought, or sudden shocks from the western financial world, or bad news from India’s own unorganized sector could take it down.