The Hindu Business Line : Growth to moderate: RBI

Outlook
Hardening global crude prices a serious risk to production growth.
Services dependent on global market may be affected by slowdown.
Reduction in IT spending may go against ITeS sector here.

Our Bureau

Mumbai, Aug. 29 The Indian economy is likely to witness a slight moderation in growth, which continues at an elevated level, unlike the global economy, which is expected to slow down significantly, said the Reserve Bank of India in its Annual Report 2007-08, which was released on Friday.

While activity in the industrial and services sector has moderated, outlook for agriculture would continue to depend upon progress of the monsoon while that for domestic food prices depends crucially on the behaviour of agricultural production, which essentially continues to be monsoon-driven.

Inflation risks have increased sharply and appear to be persistent. While both advanced and emerging market economies are facing inflationary pressures, there is less uncertainty about the growth prospects of the Indian economy in comparison with other economies.

The report also said that the conduct of the monetary policy in the context of bringing down inflationary pressures is getting complicated by global developments and domestic demand pressures.

oil price risk

The RBI also said that the hardening of the international crude oil prices poses a serious downside risk to the manufacturing sector growth during 2008-09. Higher oil prices result in transportation and product cost, which raises the cost of production and product prices. This, in turn, has an adverse impact on overall demand conditions for the manufacturing sector, the RBI said.

The impact of rise in oil prices could be more severe on those manufacturing units that depend on captive power plants operating on diesel. The rise in input costs might also further affect the consumer durables industry.

Infra concerns

Performance of the infrastructure sector continues to be a concern while that of the electricity sector was adversely affected by capacity constraints caused by problems relating to coal and ash handling units and availability of water.

Some downside risks to the industrial growth momentum during 2008-09 include under-performance of the power sector, the RBI said.

Impact on services

In case of services, those sectors that have significant dependence on the global market could be affected by the global slowdown. In particular, deceleration in global economic activity could impact the domestic trade and transportation sectors.

A loss in growth momentum globally could also affect business and leisure tourism, which in turn could hit hotels.

India’s IT-enabled services exports account for about two-thirds of ITeS-BPO revenues. While cost-cutting measures in the developed countries might increase outsourcing to India, a reduction in IT spending in these economies, on the contrary, might work against Indian ITeS industry, said RBI.