Economist magazine forecasts 7.5 percent growth for India

August 27th, 2008 - 7:13 pm ICT by IANS  

New Delhi, Aug 27 (IANS) India’s economic growth will slowdown to 7.5 percent this fiscal and tight money policies will continue, UK’s Economist magazine said Wednesday.In a statement, the magazine’s Economist Intelligence Unit (EIU) said its revised growth forecast “clearly indicated the slowdown trend”.

This forecast was in continuation of the 7.7 percent growth that it had predicted in March 2008, the EIU statement said.

The EIU, the business-to-business research and advisory arm of The Economist Group, also expected the country’s central bank the Reserve Bank of India (RBI) to remain under pressure to raise interest rates further despite the sharp tightening of monetary policy in June and July.

It said the RBI would likely increase the repo rate from 9 percent to 9.5 percent in the second half of 2008, and the reverse repo rate from 6 percent to 6.5 percent.

“The RBI’s more aggressive approach reflects its growing concern about the sudden acceleration in inflation to nearly 12.7 percent earlier this month,” the EIU statement said.

EIU’s India director of research Manoj Vohra said in the absence of other policy options, such as fiscal tightening or currency appreciation, the only way to tackle inflation was tighter monetary policy.

“The RBI is aware of the balancing act it has to do, as reflected in its policy statement on July 29, which not only raised the central bank’s inflation target for 2008-09 to 7 percent (from 5-5.5 percent), but also lowered its economic growth forecast to 8 percent (from 8-8.5 percent),” Vohra said.

“We, however, expect the real GDP growth to noticeably moderate from 9 percent last year to 7.5 percent this fiscal.”

Noting that the Prime Minister’s Economic Advisory Council (EAC) by revising its growth forecast to 7.7 percent has accepted India will witness a slowdown, the EIU said it had made the same forecast in March.

Vohra said India’s economic prospects will be undermined by higher borrowing and input costs, weaker consumer sentiment and slower external demand growth.

“Although the slowdown has so far been restricted to the industrial sector, it will spread to the services sector as the squeeze on costs becomes more pervasive and demand slackens,” he said.

According to the EIU, monetary easing will not occur until 2009, by when it expected inflationary pressures to subside.

“We forecast two 25-basis-point cuts in the RBI’s key policy rates in the second half of next year,” Vohra added.

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