India’s growth to dip to 5.5 percent, US expects

April 16th, 2009 - 8:25 pm ICT by IANS  

By Arun Kumar
Washington, April 16 (IANS) The United States expects India’s growth to slow to around 5.5 percent this year, but believes recently announced policy measures to stimulate the economy and ease credit conditions should help cushion the downturn.

“After averaging 8.8 percent over the past four years, growth is slowing largely due to lower investment, reflecting tighter financing conditions and uncertainty, as well as declining external demand, although India is less export dependent than many Asian economies,” Treasury Secretary Timothy Geithner said in a report to the Congress.

Written in the backdrop of the global financial crisis, the semi-annual report to Congress on International Economic and Exchange Rate Policies examines what policy actions 21 major economies, which make up more than 80 percent of US international trade, are taking to restore growth and achieve financial stability.

In India, year-over-year growth slowed to 5.3 percent during the fourth quarter of 2008, compared with 8.9 percent in the same quarter in 2007; but on a seasonally adjusted annualised basis, the economy contracted 2.9 percent in the fourth quarter, the first contraction since early 2004, the report noted.

“Some slowdown might have been inevitable since India had sharply tightened monetary policy through mid-2008, was growing near or above capacity, and faces infrastructure and other structural constraints,” it said.

“Global developments have hastened the downturn. Growth is expected to slow to around 5.5 percent in FY 2009/10 (April-March) due to credit conditions,” Geithner said. But “recently announced policy measures to stimulate the economy and ease credit conditions should help cushion the downturn.”

The US bilateral trade deficit with India rose to $3.1 billion in the second half of 2008 from $1.1 billion in the second half of 2007 as US exports to India fell, the report noted.

Net capital inflows shrunk significantly last year on declining portfolio flows and slowing overseas lending and short-term credit. In contrast foreign direct investment flows have risen from $9.7 billion in 2007 to $21.7 billion in 2008.

The rupee depreciated by 13.2 percent against the dollar in the second half of 2008 with significant volatility in the final quarter of the year, but fell by only 4.8 percent on a real effective basis, the report said.

The rupee has been more stable in the first two months of 2009, falling 1.1 percent against the dollar.

Reserves fell by $63 billion between July 2008 and November, reflecting in roughly equal measures significant RBI intervention to slow the rupee’s decline and valuation effects.

“Reserves rose slightly in December to around $246 billion, as portfolio flows stabilised and the RBI appeared more comfortable in letting the rupee depreciate,” Geithner noted.

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