India’s growth will be weaker than expected

Thursday, 20 October 2011 00:00 - - {{hitsCtrl.values.hits}}

NEW DELHI (Reuters): India’s economic growth will be slower than government projections, highlighting how high inflation, rising interest rates and global financial turbulence threaten the country’s momentum, Finance Minister Pranab Mukherjee said on Wednesday.

But Mukherjee hinted India may continue to tighten monetary policy, in contrast to most other major emerging economies, to keep stubbornly high inflation in check despite fears of a broader economic slowdown.

“Most of us are expecting India’s growth to go down below eight per cent. This is disappointing,” Mukherjee told a news conference. “But if we can, we must not lose perspective of the global situation. There is a slowdown all over the world.”

“Let me not hide the fact that I have been disappointed by our growth components over the last few months.

It is evident that India’s growth rate in 2011-12 will be less than what we presented in February when I presented the budget.”

The budget had projected economic growth of around nine per cent this fiscal year.

Businesses have winced at a series of rate hikes by the Reserve Bank of India (RBI) - there have been a dozen since March 2010 - and are bracing themselves for the prospect of another increase at the bank’s next policy review on 25 October.

The RBI’s stance has been hawkish compared to other major emerging economies such as Brazil and Indonesia, which have eased policy because of concerns about the sluggish global economy.

“There is no one size fits all, the central banks across the world may have been moving in a particular direction but the Indian central bank has its own concerns to take care of,” Mukherjee said.

Stubborn Inflation

The Wholesale Price Index (WPI), India’s most closely watched inflation gauge, stayed well above the RBI’s comfort zone at more than nine per cent in September.

Headline inflation readings have been above nine per cent for 10 straight months, driven up by bottlenecks affecting food distribution, weakness in the rupee and high oil prices.Foreign institutional investors (FIIs) sold more than $2.2 billion worth of Indian shares between August and September as fears of a recession in the developed world prompted global investors to sell riskier assets.

The main 30-share benchmark BSE index is down nearly 17 per cent so far this year.

“We are concerned about the volatility of FII flows,” Mukherjee said. Industrial output growth for Asia’s third-largest economy has dwindled into low single digits, while car sales are expected to rise just 2-4 per cent this fiscal year to March 2012, an industry body has forecast.

India’s industrial production grew a slower-than-expected 4.1 per cent in August over the previous year.

Exports are also forecast to slow down

Slowing growth and steadily high global oil prices have also put pressure on the fiscal deficit.

“With the crude prices remaining where they are it will be a great challenge to maintain the fiscal deficit numbers to 4.6 per cent this year,” Mukherjee said.

Private economists see the fiscal deficit widening to up to 5.6 per cent of gross domestic product in the current fiscal year 2011/12 ended-March, against government’s target of 4.6 per cent as the gap between tax receipts and spending widens.