By Xinhua,
Manila : India’s economy will experience a marked slowdown in the 2008 and 2009 financial years, ending its run of five consecutive years of very high growth, the Asian Development Bank (ADB) said Tuesday.
In its latest report “The Asian Development Outlook 2008 Update”, ADB forecast India’s growth rate to decrease to 7.4 percent in fiscal 2008 and decelerate further to 7.0 percent in fiscal 2009.
The new figures are down from ADB’s April forecasts of 8 percent and 8.5 percent respectively and much less than the impressive 9 percent growth posted in the last fiscal year ending March 2008.
Current developments are challenging India’s strong growth performance of recent years, according to the report. Emerging capacity constraints, continued rapid expansion in credit, and an increase in global commodity prices have combined to trigger a spike in domestic inflation.
Global commodity prices and domestic demand growth supported by price subsidies will continue to place upward pressure on prices.
Further, the Indian government’s attempts to rein in inflation through monetary policy tightening combined with ad hoc interventions, including reduction in customs duties and bans on export of essential commodities, are having limited impact, said the Manila-based ADB.
Real interest rates have actually fallen and the projections for the inflation rate, based on the wholesale price index, have been adjusted upward to 11.5 percent in fiscal 2008 and 7.5 percent in fiscal 2009.
“The Indian economy is now at a critical juncture where policies to contain inflation and ensure macroeconomic stabilization have taken centre stage,” ADB chief economist Ifzal Ali said in a statement.
Gross domestic product (GDP) growth, at 7.9 percent in the first quarter of fiscal 2008 (April-June), saw the slowest expansion in three and a half years.
The most pronounced slide was in industry, dragged down by a halving in the manufacturing growth rate.
Higher interest rates and a weakening global and domestic outlook have caused companies to scale back investment.
According to the report, India’s growth in investment will continue to be limited by faltering business confidence, fewer options for foreign financing owing to a drop in risk appetite by foreign financial institutions, growing difficulties in securing domestic bank financing, and the need to maintain tight monetary conditions and high interest rates to bring down inflation.
The trade and current account deficits have grown wider in recent years, reflecting the impact of escalating oil prices and the expansion in non-oil imports, led by rapid growth in consumer and investment demand.
Net capital inflows are on a much lower track than a year ago as foreign exchange reserves have fallen by 13 billion dollars in the first five months of fiscal 2008 (April-August). Nevertheless, the accumulated reserves of over 20 percent of the fiscal year’s estimated GDP provide a very generous cushion against external vulnerabilities.
According to the report, the escalation in oil, fertilizer and food subsidies as well as other off-budget liabilities have created large fiscal imbalances.
“Cutting the subsidies is a daunting task, but maintaining them would imperil any return to the high-growth path of recent years,” Ali said.
The report says that India faces a serious dilemma in macroeconomic stabilization.
On the one hand, further monetary tightening could threaten growth objectives. On the other hand, financing the current level of subsidies will increase the pressure for rapid credit expansion which, unless checked, will lead to higher inflation.
Additional tightening in policy, raising both nominal and real interest rates, will be likely required, according to the report.
“Dealing with rising prices and a worsening fiscal situation, as well as the need to adopt structural reforms to fulfil the country’s enormous economic potential present a difficult task for the country’s economic managers,” said the economist.