<?xml version="1.0" encoding="UTF-8"?><root available-locales="en_US," default-locale="en_US"><static-content language-id="en_US"><![CDATA[Keeping India's economic growth at about 9 per cent a year will be a challenge due to inflation and infrastructure constraints, and lifting it higher will be even harder, the economic survey has said.
But inflation was likely to remain moderate in coming months and capital inflows, which have pushed the rupee up and complicated monetary policy, should ease in 2008, the economic survey for fiscal year 2007/08 said.
Released a day before the annual budget, it said more reforms were needed to raise economic expansion above 8-9 per cent but also warned that a shortage of skilled workers was pushing up wages and could erode India's price advantage. "The new challenge is to maintain growth at these levels, not to speak of raising it further to double-digit levels," the report, prepared by the finance ministry, said.
The yield on the benchmark 10-year bond eased 1 basis point to 7.58 per cent after the survey and the partially convertible rupee slipped to 39.815/825 per dollar from 39.795/805 beforehand.
Indian policymakers have repeatedly talked of stepping up growth to 10 per cent a year to reduce mass poverty and Finance Minister Palaniappan Chidambaram said after the report was released he was confident of achieving an average 9 per cent up to 2012 while still keeping a grip on inflation.
"I am optimistic about growth and containment of inflation in the coming year," he told reporters. "It will be my priority to provide a conducive investment climate and manage the macro economy to facilitate non-inflationary growth."
Chidambaram presents his fifth and final budget of this administration on Friday and is widely expected to offer some tax giveaways while spending more on farms, health, education and infrastructure to spread the benefits of high growth.
Price Pressures
The economic survey contains policy prescriptions which may not necessarily translate into actual policy or form part of the budget but it does provide clues to medium-term direction. Analysts said the survey's acknowledgement that 9 per cent and above was going to be tough without reforms highlighted the budget challenge facing Chidambaram of balancing growth with price pressures ahead of national elections due in 2009. "This underscores the point that under the current environment any growth faster than 9 per cent could turn out to be inflationary," said A. Prasanna, economist at ICICI Securities.
Growth is estimated at 8.7 per cent this fiscal year to 31 March after an 18-year high of 9.6 per cent in 2006/07. Annual inflation, based on wholesale prices, hit a six-month high of 4.35 per cent in early February but consumer price inflation is closer to 6 per cent.
The survey said inflation would be about 4.4 per cent this fiscal year but the behaviour of farm prices would be a key determinant in the coming year. Commodity price inflation should be tackled with trade and fiscal policies.
A surge in capital inflows, including foreign direct investment, would continue "in the medium term", although in the short run inflows may moderate due to slightly slower growth, easing pressure on the exchange rate, it said. "Any reduction in excess capital flows from the high levels of 2007 may affect the equity markets in the short term but will make the task of monetary management easier."
Eroding Advantage
India serves as a back office for global banking and financial services firms which have taken advantage of a low-cost English-speaking labour force. But a lack of quality education means white-collar workers are in increasingly short supply in areas such as software and finance, creating wage inflation of 10-15 per cent and high attrition rates.
"Wage costs are rising which not only contributes to cost-push inflation, but may also end up eroding price advantage in some of the tradable sectors of the economy," the survey warned. India is gradually opening up its current account, although the high capital inflows last year prompted it to clamp down on some sources of external funding.
The survey said opening the current account must continue despite short-term reversals, as that would increase competition and improve the deployment of funds for asset creation. Other necessary reforms included greater foreign participation in insurance and retail as well as deregulation of the sugar, fertiliser and drug industries.
(Reuters)