India: Expected Slow Growth

Indian EconomyIndia expects its economy to expand at 8.7 percent in the fiscal 2007/08, slower than the previous year, as higher interest rates dent consumer demand. Analysts expect growth to cruise at a similar speed next year.

While still strong, Asia’s third-largest economy has lost altitude from the heady 9.6 percent expansion seen in 2006/07 and the forecasted 8.7 percent would be the slowest growth in three years.

However, the Reserve Bank of India (RBI) chief said that Thursday’s official estimate would not alter the RBI’s ‘wait-and-see’ approach as the figure was broadly in line with its forecast of 8.5 percent for the fiscal year that ends on March 31.

Analysts had been looking for the gross domestic product to moderate this year from its fastest pace in 18 years in 2006/07, with a Reuters poll forecasting an expansion of 8.7 percent.

“Clearly moderation has set in, essentially driven by industrial moderation,” said Shubhada Rao, Chief Economist, Yes Bank.

“Going forward in (fiscal year 2008/09) we expect growth to maintain 8.5 percent levels, led by infrastructure spending.”

Financial markets were cool to the estimate, the first for this fiscal year, with the partially convertible rupee dipping to 39.5450/5600 per dollar from about 39.49/50. The benchmark 10-year federal bond yield was initially stable at 7.49 percent but later slipped to 7.47 percent after the RBI said that inflation was contained.

Growth in manufacturing, which makes up nearly 15 percent of the GDP, was expected to slow to an annual 9.4 percent from 12 percent from the previous year, the central statistics office said.

The RBI raised interest rates five times in 10 months from June 2006 and tightened banks’ reserve requirements repeatedly last year in an attempt to restrain inflation and credit growth.Annual inflation, as measured by wholesale prices, has subsided to just below 4 percent, below the central bank’s comfort ceiling of about 5 percent. However, the monetary authority kept rates steady last month, saying inflation risks persisted.

Just over half the analysts polled by Reuters after that decision saw the central bank cutting rates by 25-50 basis points by June, while the rest saw no change for the next five months, at least.

RBI officials told reporters on Thursday that inflation had been contained but Governor Yaga Venugopal Reddy said that the “inherent logic” of last week’s rate decision had not changed.”There is no fresh information that requires any particular response,” he told reporters. “We are watching the evolving uncertainties.”

Harish Menon, an economist with ING Vysya Bank, expected growth to end the year close to the 8.7 percent estimate.”This will be in line with the central bank’s calibrated moves to avoid overheating of the economy,” Menon said.

The government said services, which make up more than half of the economic activity, were expected to grow at 10.7 percent in 2007/08.

Farming, which generates a fifth of the GDP, but employs about 60 percent of the billion-plus population, was estimated to expand 2.6 percent, while electricity generation was seen growing at 7.8 percent and mining output 3.4 percent.

The latest available data shows that production of consumer goods contracted in November compared to November 2006 and that the truck makers, Ashok Leyland and Tata Motors, have seen their sales decline this fiscal year due to tight credit conditions.

Menon expected economic growth to pick up momentum in 2008/09 and top 9 percent once again, making it one of the world’s fastest-growing major economies.

However, others saw a possible U.S. recession and comparatively high Indian interest rates creating headwinds for the economy, particularly if the rupee, which gained more than 12 percent against the dollar in 2007, continued to rise.

“Going forward there are clearly downside risks to growth emerging from external factors,” said Sonal Varma, an economist at Lehman Brothers

Raghav Agarwal[Image Courtesy: ]