Economic growth on track, high oil prices a risk

India's economy will grow around 9% in the fiscal year that started in April if global crude prices remain under control, a top financial ministry official said on Monday, even as private sector economists predict slowing growth.
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Apr 25, 2011, 09.36 PM | Source: Reuters

Economic growth on track, high oil prices a risk

India's economy will grow around 9% in the fiscal year that started in April if global crude prices remain under control, a top financial ministry official said on Monday, even as private sector economists predict slowing growth.

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Economic growth on track, high oil prices a risk

India's economy will grow around 9% in the fiscal year that started in April if global crude prices remain under control, a top financial ministry official said on Monday, even as private sector economists predict slowing growth.

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Economic growth on track, high oil prices a risk
India's economy will grow around 9% in the fiscal year that started in April if global crude prices remain under control, a top financial ministry official said on Monday, even as private sector economists predict slowing growth.

Analysts have been trimming their 2011/12 growth forecasts for Asia's third-largest economy, citing high inflation, high oil prices and the prospect of higher interest rates.

Last week, Goldman Sachs cut its India growth forecast to 7.8% from 8.7% for the current fiscal year, and raised its inflation forecast to 7.5% from 6.7%.

"Will the capex (capital expenditure) go down because of inflation? Could be marginal. But I don't expect that to hit overall growth," R Gopalan, economic affairs secretary in the ministry of finance, told Reuters in an interview.

"So, I don't see any concern on growth, barring crude prices," he said.

Oil rose above USD 124 a barrel on Monday, pushed higher by an escalation of violence in the Middle East, as well as post-election unrest in OPEC member Nigeria.

An increase of USD 10 a barrel in crude oil prices has the potential to dampen India's economic growth by 0.3-0.5 percentage points, brokerage and investment group CLSA said in a note earlier this month.

In February, the government forecast annual economic growth in the range of 8.75% and 9.25% for this financial year. Many private economists expect the economy to grow substantially slower than an expected 8.6% in the fiscal year that ended in March.

Weaker-than-expected growth in industrial output in February, coming on the heels of a slowdown in service sector growth in March added to evidence that the pace of expansion in Asia's third largest economy may be moderating.

Inflation, which stood at nearly 9% in March, is seen crimping domestic demand, while eight interest rate hikes by the central bank since March 2010 have begun to hurt investment.

A slowdown in capital goods output growth in February for the third straight month points to sluggish investment spending.

Inflation vs growth

New Delhi is seen risking losing control of inflation in its pursuit of growth. Some analysts are calling for a bolder monetary policy response from the central bank next month, after non-food manufacturing inflation hit a 29-month high in March.

Still, market players expect the Reserve Bank of India to stick with its "calibrated" approach to monetary tightening and raise lift rates by 25 basis points (bps) on May 3.

Gopalan expects headline inflation to start easing in the September-December quarter and defended India's inflation management, despite price rises that have consistently exceeded official forecasts.

"We could have been aggressive. But what would have happened to growth? And growth has its own implications for the budget, with the kind of expenditure which is required," he said.

"Can growth be allowed to moderate?" he asked.

While India needs high growth in part to help the government trim its fiscal deficit, some observers say it should aim to slow growth in order to tame inflation.

High inflation is also seen to be preventing New Delhi from passing on high global crude prices to consumers, which could aggravate price pressures. Adjusting fuel prices will have a bearing on the government's fiscal health as well.

"If it is passed on through the fiscal deficit, inflationary expectations are anchored little bit more than passing it through prices," Gopalan said.

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