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India's Growth Seen Hurt By Inflation, Rate Pressures

BW Online Bureau Nov 08, 2014

<?xml version="1.0" encoding="UTF-8"?><root available-locales="en_US," default-locale="en_US"><static-content language-id="en_US"><![CDATA[Economists have scaled down their growth expectations and raised inflation forecasts for the Indian economy, compared with their outlook just 10 weeks ago, a Reuters quarterly poll showed. A poll of more than 20 economists, taken over the past week, showed the median estimate for 2011/12 GDP growth in Asia's third largest economy was down to 7.9 percent from 8.3 percent in the previous poll in May. "Just two months ago we were expecting an 8.8 per cent growth rate for this fiscal year but inflation is not showing signs of moderation, interest rates have surged and global uncertainty has increased so we were forced to revise it down to 8.1 per cent," said Arun Singh, senior economist at Dun & Bradstreet. The Indian economy grew 7.8 per cent in the March-quarter from a year ago, its slowest annual pace in five quarters, as rising interest rates crimped consumption and investment. Indian GDP is expected grow 7.8 per cent in the June-quarter and then slow to 7.5 percent in the next quarter, but pick up after that to stay above 8 percent until at least the end of 2012, according to the poll. In the previous poll, growth was seen above 8 per cent in all quarters of the fiscal year ending March 2012. The outlook for GDP growth in 2012-13 dipped marginally to 8.4 per cent from 8.5 per cent in the last poll. The Reserve Bank of India (RBI) has raised rates 10 times since March 2010, ranking it among the most aggressive central banks in the world, and is expected to raise rates again by 25 basis points at its quarterly review on July 26. While the biggest snags for the euro zone and the United States are ongoing debt crises, the holdup for emerging nations is rampant inflation. For India, headline inflation remains above 9 percent despite the spate of rate increases, spurring policy makers to also scale down their growth expectations. "If need be we can live with slightly lower growth in order to have sustained long-run growth. So inflation needs to be controlled. There are no two ways about it," Kaushik Basu, chief economic adviser in the finance ministry, said on Thursday. This has caused a marked slowdown in investment and consumption but economists believe the macro economic fundamentals of the economy are strong and growth will pick up in the second half of the fiscal year. "Growth will remain subdued for two quarters, until September, but I believe once inflation subsides and there is some visibility and clarity on the growth rate of the international economy, everything should be in line," said Dun & Bradstreet's Singh. Inflation, Rates Despite the predicted interest rate hike, median consensus from the latest poll also showed economists revising up their forecasts for inflation for this fiscal year and the next. Their forecast for inflation, as measured with the wholesale price index, is now at 8.5 perc ent for 2011-12 from 7.7 per cent in the previous poll, and 6.5 per cent for 2012-13. Rising global crude oil prices and food inflation have been the main drivers of inflation in India with the latest figure, released last week, showing wholesale prices rose 9.44 percent in June. "It is going to come down extremely slowly as we go ahead. The main drivers will continue to be crude and the latent pressures that are already in the system and have to still spread out," said Sumita Kale, Chief Economist at Indicus Analytics. "I think the RBI has already factored that in and will probably have another couple of rate hikes and then see how to go after September." Forecasts for the RBI's repo rate remained unchanged from a poll on June 14, with economists still expecting hikes of 25 basis points in the current quarter and next, taking the rate to 8 percent by end-2011, followed by unchanged interest rates until at least the end of December 2012. (Reuters)