India forecasts lower growth

2012-02-07 12:27

New Delhi - India’s economic growth may dip below 7% in the current fiscal year, the slowest pace since the 2008 financial crisis, restrained by the central bank’s inflation-fighting campaign and government gridlock.

The government forecast 6.9% annual growth for the fiscal year that ends in March, a tad below the 7% to 7.5% growth predicted by several government officials.
It would mark a sharp decline from the prior year’s 8.4% growth rate, and a reversal of fortune for a country that until recently aspired to double-digit growth like China.

The Indian economy has slowed as the eurozone crisis combined with tight monetary policy and political paralysis at home have discouraged investment.

There is little hope for a quick turnaround. Although the Reserve Bank of India is widely expected to begin cutting interest rates after an aggressive 18-month tightening campaign came to an end in October, domestic growth still looks shaky and the global outlook uncertain.

Inflation pressures

Inflation also remains elevated, making it tougher for the central bank to prop up growth.

“We are not expecting any sudden reversal in economic growth. Global growth remains weak. Things on the domestic front have not improved either,” said Indranil Pan, chief economist at Kotak Mahindra Bank, who expects the economy to grow 6.7 percent this fiscal year and 6.6 percent in the following year.

Unlike most of its Asian peers, India runs fiscal and current account deficits, leaving it reliant on notoriously fickle foreign investors for financing. Investment has been flowing back into India so far in 2012, after outflows in 2011, but that could change if the eurozone crisis deteriorates.

The government’s advance estimate for the fiscal year 2011/12 shows that farm output is expected to grow 2.5%, while the manufacturing sector is likely to grow 3.9%.
Indian shares and bonds remained unchanged following the release of the growth estimate.

The RBI last month cut the current fiscal year growth forecast to 7 percent from 7.6% and warned of rising risks to economic growth.

“From the monetary policy point of view, signals are very clear that policy will remain accommodative,” said Sujan Hajra, chief economist at Anand Rathi Securities.

He predicted the central bank would cut both interest rates and banks’ reserve requirements by as much as one full percentage point by October.
With inflation showing signs of finally easing and risks to growth on the rise the RBI is widely expected to cut interest rates by the end of June, if not sooner. It has already signalled it is finished raising rates after 13 increases between March 2010 and October 2011.

Headline inflation slowed down to a two-year low of 7.47% in December, but that was due almost entirely to a drop in food inflation that is widely seen as unsustainable.

Also, non-food manufactured inflation at 7.7% in December remained way above the central bank’s comfort zone. The next monetary policy review is due on March 15.
“We don’t think the RBI will cut rates in March. They will wait for the federal budget that is scheduled in mid-March,” said Pan, who expects a 25 basis point rate cut in April.

In his January policy review, the RBI governor flagged the inflationary risks stemming from the government’s failure to contain its fiscal deficit and had said a lack of credible fiscal consolidation would constrain him from lowering rates.

He had urged the government to use the March budget to signal fiscal consolidation.