Last updated: August 13, 2008 2:03 pm

Indian growth expected to cool to 7.7%

India’s economic growth will slow to 7.7 per cent this fiscal year from 9 per cent in 2007 as high oil and food prices and tightening credit markets take their toll, a government panel forecast on Wednesday.

In its outlook for the year through March 2009, the Economic Advisory Council to Prime Minister Manmohan Singh said inflation would slow to 8 to 9 per cent, but said that the central bank would have to maintain a “tight monetary stance” to tame rising prices.

The council also warned of mounting fiscal stress due to rising government subsidy bills for items as petroleum products and fertiliser, forecasting that off-budget liabilities would reach around 5 per cent of GDP.

“Despite appreciable fiscal consolidation, large and growing off-budget liabilities are a matter of concern,” the report said. “When these are included, the fiscal situation no longer looks stable and sustainable.”

India’s economy has grown an average of 8.8 per cent a year for the last four years, attracting the attention of global investors. But the council said India is being hit by international economic turbulence.

“The downside risk to our growth expectations in 2008/09 is primarily from a further deterioration of global conditions with its attendant impact on India, be it in the sphere of oil prices or capital markets,” the report said. “Broadly, financial conditions are not likely to stabilise before early 2009.”

However, the council described the projected slowdown in growth as “modest,” given the magnitude of the global shocks.

Speaking separately after meeting with bankers on Wednesday, P. Chidambaram, finance minister, said growth this year would be close to 8 per cent and that state-run banks had not seen any weakening in loan growth for investment. India’s central bank is also forecasting growth of 8 per cent.

“There is no slowdown (of credit growth) as far as infrastructure, project expansion and new projects are concerned,” he said.

India’s growth spurt of recent years has been fuelled by private investment and domestic consumption, but the council said both would slow this year. The Reserve Bank of India’s benchmark interest rate is at a seven-year-high as it battles inflation at a 13-year high of 12 per cent.

While surging global oil and food prices have fuelled inflation, India’s economic challenges are not all imported. The report said economic growth is being hampered by domestic supply-side constraints, particularly in infrastructure such as power, irrigation and transportation.

India’s agricultural output will also grow just 2 per cent, down from a 4.5 per cent expansion last year, due in part to an erratic monsoon, highlighting the challenge India faces in boosting agricultural productivity and meeting rising demand for food grains.

Industrial output is forecast to grow 7.5 per cent, down from 8.5 per cent , with industry still facing constraints from power shortages, while the service sector is projected to grow 9.6 per cent, down from 10.8 per cent last year.

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