The Hindu Business Line : Economist Group arm lowers GDP growth estimate to 7.5% in 2008-09

“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.”

K.R. Srivats

New Delhi, Aug. 27 Even as the Prime Minister’s Economic Advisory Council (EAC) has recently pegged its GDP growth forecast for 2008-09 at 7.7 per cent, the Economist Intelligence Unit (EIU) has further lowered its earlier estimate of 7.7 per cent in March 2008 to 7.5 per cent now.

The business intelligence arm of the London-based Economist Group also 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.

The EIU is of the view that the RBI would in the second half of 2008-09 increase the repo rate from 9 per cent to 9.5 per cent and the reverse repo rate from 6 per cent to 6.5 per cent.

“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 29, which not only raised the central bank’s inflation target for 2008-09 to 7 per cent (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”, Mr Manoj Vohra, India Director (Research), EIU, said.

Meanwhile, Moody’s Economy.com, a subsidiary of Moody’s Corporation, has said that it expects India’s annual GDP to decelerate sharply to 7.9 per cent in 2008, but rebound mildly the following year. Amid slowing credit growth and higher interest rates, domestic demand will ease notably in the second half of the year, Moody’s subsidiary said in its latest India Outlook.

Looking ahead, it said that strong inflation would squeeze household budgets, hurting consumption growth in real terms. The disappointing stock market performance in recent months will not only weigh on investor sentiment, but its negative wealth effect will also discourage spending. Hence, private consumption growth is projected to slow to around 5 per cent this year.

“In light of global credit woes, which curb access to funding by international investors and weigh on market sentiment, India’s investment growth is expected to moderate in 2008. However, the potential for strong returns will maintain India’s appeal to some investors, helping to keep investment growth in double-digit territory, albeit slower than the breakneck pace recorded in previous years. Meanwhile, the rupee will strengthen as capital inflows regain momentum later in the year”, says Moody’s Economist.com.

Moody’s Economy.com expects the wholesale inflation in India to peak in the September quarter and return to single-digit territory towards the end of the year. It has also said that the RBI is likely to refrain from adjusting monetary policy until the next meeting.

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