IMF projects Indian growth to slow down to 5.25 percent

March 18th, 2009 - 12:06 pm ICT by IANS  

By Arun Kumar
Washington, March 18 (IANS) With corporate investment expected to slow down in the face of the global economic crisis, the International Monetary Fund (IMF) projects India’s growth to moderate to 6.25 percent in 2008-09 and further to 5.25 percent in 2009-10.

“After five years with average growth of 8.75 percent, India’s economy is slowing,” the IMF said in a background paper on the IMF Executive Directors’ assessment after the annual Article IV Consultation with New Delhi.

“Partly reflecting the deteriorating global outlook,(IMF) staff project India’s growth to moderate to 6.25 percent in 2008/09 and further to 5.25 percent in 2009/10,” it said, noting that India’s Central Statistical Organization advanced estimates for 2008-09 (April-March) put real GDP growth at 7.1 percent.

“Corporate investment — the major growth driver during recent years — is expected to slow because of weakening profitability and confidence, and tightening of financing conditions from foreign and non-bank sources.”

“Policy measures to stimulate the economy and a good harvest should support domestic demand,” IMF said. But “the uncertainty surrounding the forecast is unusually large, with significant downside risks. The main upside risk stems from a larger-than-anticipated impact of the stimulus measures that the authorities have already implemented”.

After rising to nearly 13 percent (year-on-year) in August 2008, headline inflation (wholesale price index) dropped to 4.4 percent (y/y) at the end of January 2009.

With commodity prices waning and demand slackening, inflation is expected to fall further to 3 percent (y/y) by March 2009 and to 2 percent on average in 2009/10.

The current account deficit is projected at about 3 percent of GDP in 2008/09, primarily due to a markedly higher oil import bill.

While export performance has deteriorated sharply in recent months, softer import growth is keeping the trade deficit in check. For 2009-10, the current account deficit is forecast to narrow to 1.5 percent of GDP, reflecting lower oil prices and weaker domestic demand, the IMF said.

After last year’s record of 9.2 percent of GDP, capital inflows are expected to decline this fiscal year; until December 2008 portfolio investment recorded a $11 billion outflow and external commercial borrowing has slowed considerably, though there has been a mild recovery in portfolio investment since October 2009 and foreign direct investment (FDI) has held up relatively well.

While reserves have declined this fiscal year, from a historic peak of $315 billion in May 2008 to $252 billion as of Feb 6, 2009, they remain adequate compared to the country’s gross financing requirement and imports.

As a result of the global crisis, the stock market index declined by over 50 percent in 2008 and the rupee depreciated 23 percent versus the US dollar and 13 percent in nominal effective terms.

The IMF staff project the Indian central government deficit at about 7 percent of GDP this year, including 1.25 percent of subsidy-related bond issuance. The general government deficit, which includes the states’ deficit, is forecast to rise to nearly 10 percent of GDP.

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