Relook at India Growth Story by EIU

The Economist Intelligence Unit estimates India’s economic growth to be at 7.5% this fiscal. This revision is in continuation with the earlier forecasts made by the business intelligence arm of The Economist Group, which clearly indicated the slowdown trend. The Economist Intelligence Unit had pegged the figure at 7.7% in March’08.

The Economist Intelligence Unit expects 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 this year. Economist Intelligence Unit believes that in the second half of 2008 the central bank will increase the repo rate from 9% to 9.5%, and the reverse repo rate from 6% to 6.5%. The RBI’s more aggressive approach reflects its growing concern about the sudden acceleration in inflation to nearly 12.7% earlier this month.

“In the absence of other policy options, such as fiscal tightening or currency appreciation, the onus will remain squarely on monetary policy to tackle inflation. The RBI is aware of the balancing act it has to do, as reflected in its policy statement on July 29th, which not only raised the central bank’s inflation target for 2008-09 to 7% (from 5-5.5%), but also lowered its economic growth forecast to 8% (from 8-8.5%). We, however, expect the real GDP growth to noticeably moderate from 9% last year to 7.5% this fiscal” Manoj Vohra, India Director (Research), The Economist Intelligence Unit said.

The Prime Minister’s Economic Advisory Council (EAC) has accepted that India will witness slowdown in growth and revised India’s GDP forecast to 7.7%—something which the Economist Intelligence Unit had forecasted in March this year.

Mr Vohra said that 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.

The Economist Intelligence Unit believes that monetary easing will not occur until 2009, when it expects 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”, Mr Vohra added.

The Economist Intelligence Unit is the business-to-business arm of The Economist Group and provides geopolitical, economic and business analysis on more than 200 countries, as well as strategic intelligence on key industries and management practices.