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Jerry Hansin 30 May 2008 World News | 2 Comments

Indian economy surprises with 9.0% growth but slowdown looms
Posted: 30 May 2008 2252 hrs

NEW DELHI : India’s economy grew nine percent in the last fiscal year, second only to China among big economies, but the better than expected figure was overshadowed by a surge in inflation, data showed Friday.

Growth to March 2008 was down from the previous year’s 9.6 percent but still marked the third straight year the economy expanded by nine percent or more despite aggressive monetary tightening to tame price rises.

Annual growth was 8.8 percent in the fourth quarter to March, underpinned by strong construction and investment. But interest rates at six-year highs dented manufacturing growth, which virtually halved to 5.8 percent.

The fourth-quarter figure was far better than market expectations of 8.1 percent and full-year growth, although the lowest in three years, beat a government estimate of 8.7 percent.

“India has clearly shifted to a different growth trajectory as can be seen by macroeconomic fundamentals such as investment activity and rising disposable incomes,” said Shubhada Rao, chief economist at Mumbai’s Yes Bank.

Rao and other economists, however, still expected growth to slow this year as high borrowing costs and tough global financial conditions bite, with some forecasting expansion as low as seven percent.

Finance Minister Palaniappan Chidambaram predicted growth of 8.5 percent.

Meanwhile, last year’s strong growth numbers were offset by concern over inflation, which rose to a near four-year high of 8.1 percent for the week ended May 17 from 7.82 percent a week earlier.

Inflation, which has doubled in four months, is of acute concern to the Congress-led government as it faces national elections by May 2009 and fears a voter backlash over prices.

Chidambaram called the price rise “worrisome” and pledged the left-leaning government “will do our best to contain, moderate and reverse” inflation.

But he said the administration, which has already introduced a slew of fiscal measures to try to check inflation such as banning exports of key commodities like rice, had no “instant answers.”

Economists forecast inflation would push even higher if the government goes ahead with an expected rise in state-set fuel prices to stem huge losses at public sector oil firms after the global surge in crude prices.

“The pain’s not yet over. If you’re to add in prospects of the imminent fuel hike, inflation looks like coming closer to nine percent or even over nine percent,” said Yes Bank’s Rao.

The government has been hesitating over hiking fuel prices as it fears the move’s impact on poor voters, but was expected to make a final decision within days.

The government faces general elections by May 2009 and suffered a big setback in polls last weekend in the southern Karnataka state — a vote seen as partially a referendum on high prices.

Analysts said the economy’s unexpected strength gave the central bank more leeway to move to tame inflation.

While some expected a rate hike, others said they expected the bank to focus on curbing inflation-fuelling liquidity by raising the cash reserve ratio — the portion of money commercial banks must keep on deposit.

Chidambaram said policy-makers were walking a tightrope.

“We have to ensure the instrument of interest rates moderates inflation but at the same time does not dampen growth,” he said.

Still, said Chidambaram, “despite the rise in commodity and oil prices, and financial turbulence and the meltdown of some global financial institutions, India has been able to grow at nine percent for the third year running.”

For this year, “our view is growth is moderating rather than slowing sharply,” said Goldman Sachs economist Tushar Poddar, saying “robust investment demand (was) driving growth” that he projected at 7.8 percent.

While high oil prices and inflation had increased risks to growth, “this should be mitigated by a very loose fiscal policy and expectations of a good crop this monsoon,” Poddar said.

- AFP /ls

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