The Hindu Business Line : Growth rate to moderate at 8% in fiscal 2008, says Goldman Sachs

New Delhi, Dec 19 The Indian economic growth is set to moderate to around 8 per cent in financial year 2008-09 before improving to around 8.3 per cent in the next fiscal.

This will be due to the cyclical headwinds of high interest rates, rapid currency appreciation, weakening global demand and high oil prices even though investment demand will remain robust, according to research report released by Goldman Sachs.

The report on Indian economy also suggests that the growth in consumption demand will be slow, restrained by high interest rate and further because external demand will be a net negative contributor to growth.

Structurally strong

It, however, points out that the economy will remain structurally strong, particularly because of higher savings and investment rates, favourable demographic structure and increase in productivity from a low base.

India’s reliance on domestic demand and lower external linkages would shield the economy considerably from the down turn in the US and other emerging markets.

The report also forecasts that core inflation will be contained within the Reserve Bank of India’s target range of 4-5 per cent. It points out that although there are upside risks from liquidity remains very loose, high oil and commodity prices and further fiscal expansion; falling output gap, further currency appreciation and well anchored inflationary expectations will act as a lid on core inflation.

Monetary policy

The RBI’s monetary policy is expected to be more accommodative in fiscal 2008-09 and 2009-10 as growth moderates and in response to declining global interest rates.

However, capital inflows are expected to remain strong enticed by the India growth story, the report adds.

Among the key risk factors for continued growth would be significant deterioration in the political or external environment while upside risks stem from higher than expected inflows or looser fiscal and monetary policies leading to loosening of financial conditions.

Also, political instability in Pakistan, Sri Lanka and Nepal and army rule in Bangladesh could impact the growth process, particularly if a large negative shock in any of the neighbouring country spills over to India, the report points out.