Indian economic growth seen hurt by inflation, rate pressures

BANGALORE: Economists have scaled down their growth expectations and raised inflation forecasts for the Indian economy, compared with their outlook just 10 weeks ago, a Reuters quarterly poll showed.

A poll of more than 20 economists, taken over the past week, showed the median estimate for 2011/12 GDP growth in Asia’s third largest economy was down to 7.9 percent from 8.3 percent in the previous poll in May.

Just two months ago we were expecting an 8.8 percent growth rate for this fiscal year but inflation is not showing signs of moderation, interest rates have surged and global uncertainty has increased so we were forced to revise it down to 8.1 percent,” said Arun Singh , senior economist at Dun & Bradstreet.

The Indian economy grew 7.8 percent in the March-quarter from a year ago, its slowest annual pace in five quarters, as rising interest rates crimped consumption and investment.

Indian GDP is expected grow 7.8 percent in the June-quarter and then slow to 7.5 percent in the next quarter, but pick up after that to stay above 8 percent until at least the end of 2012, according to the poll.

In the previous poll, growth was seen above 8 percent in all quarters of the fiscal year ending March 2012. The outlook for GDP growth in 2012/13 dipped marginally to 8.4 percent from 8.5 percent in the last poll.

The Reserve Bank of India (RBI) has raised rates 10 times since March 2010, ranking it among the most aggressive central banks in the world, and is expected to raise rates again by 25 basis points at its quarterly review on July 26.

While the biggest snags for the euro zone and the United States are ongoing debt crises, the holdup for emerging nations is rampant inflation.  For India, headline inflation remains above 9 percent despite the spate of rate increases, spurring policy makers to also scale down their growth expectations.

“If need be we can live with slightly lower growth in order to have sustained long-run growth. So inflation needs to be controlled. There are no two ways about it,” Kaushik Basu , chief economic adviser in the finance ministry, said on Thursday.

This has caused a marked slowdown in investment and consumption but economists believe the macro economic fundamentals of the economy are strong and growth will pick up in the second half of the fiscal year.

“Growth will remain subdued for two quarters, until September, but I believe once inflation subsides and there is some visibility and clarity on the growth rate of the international economy, everything should be in line,” said Dun & Bradstreet’s Singh.