India cuts growth forecast as rate hikes bite

NEW DELHI,  (AFP): India on Wednesday cut its growth forecast for this financial year to 8.6 percent from nine percent following a string of interest rate hikes introduced to tame inflation.

The finance ministry’s forecast is above last year’s expansion of 8.5 percent and higher than most private economists’ expectations, which fall as low as 7.5 percent.

“In the short run, lowering inflation can have a dampening effect on growth, but (it) is positive for sustained medium- to long-term growth,” the ministry said in a statement.

The Congress-led government had projected nine percent growth for this financial year to March 2012 in its budget presented in February but 10 interest rate hikes since March 2010 have hit industrial output. The government’s decision to lower its growth projection came after data earlier in the month showed industrial output in May grew just 5.6 percent year-on-year -- its weakest pace in nine months.

While growth of seven-to-eight percent would be envied by Western economies, experts say India needs at least 10 percent expansion to lift hundreds of millions of Indians out of crushing poverty.

Neighbouring China, which is also tightening monetary policy to fight inflation, reported this month that its economy expanded at a slower but still robust 9.5 percent year-on-year in the second quarter.

Analysts expect the Indian central bank to hike interest rates again at a policy meeting later this month as it struggles to subdue inflation running at 9.44 percent. The finance ministry said it aims to reduce inflation to 6.0-6.5 percent in coming months.

It also warned that high commodity prices and the eurozone sovereign debt crisis could hit India’s strong export growth and forecast a slowdown in the volume of global trade.

During the first quarter of the financial year, from April to June, India’s exports surged 46 percent, buoyed by renewed demand in European and US markets.