The Hindu Business Line : India to grow at 7-7.5% in 2008, says S&P report

Global credit rating agency Standard & Poor’s, in its latest outlook for the Asia-Pacific markets, has estimated that India’s real GDP growth will moderate to 6.5-7.0 per cent in 2009 even as consumer price based inflation will thaw to 5.0-5.5 per cent. The agency expects the easy monetary policy stance of the central bank to continue during 2009.

In calendar year 2008, S&P expects India’s real GDP to grow by 7.0-7.5 per cent. It has pegged consumer price based inflation to be in the 7.2-7.6 per cent range.

Significantly, the Reserve Bank of India, in its mid-term review of the Annual Policy on October 24, 2008, had projected India’s overall real GDP to grow in the 7.5-8.0 per cent range in financial year 2008-09. The central bank expects FY2009 to end with an inflation of 7 per cent.

According to S&P, ongoing market dislocation would significantly impact the Asia-Pacific region in 2009. However, factors such as intra-regional trade, supportive policy making, and still-robust forecasts for China and India would help the region navigate the global storm.

“Regional growth drivers such as strong domestic demand in China and India and the supportive monetary policy stances of the region’s governments will enable most economies to experience positive, albeit, slowing, growth in 2009. 2009 will not be an outstanding year by any means, but it will reflect the region’s resilience and collective ability to moderate fluctuations around a strong growth trend rate,” said Dr Subir Gokarn, S&P’s Asia-Pacific Chief Economist.

The rating agency holds the view that abatement of all three drivers – food, commodity and oil prices – of inflation has significantly impacted the inflation outlook for the Asia-Pacific region. However, for countries that did not fully pass on higher oil prices – such as China, India, Malaysia, and Indonesia – the decline may not immediately translate into lower inflation rates.

“Oil prices have come down particularly sharply and our baseline expectation is that they will remain in the $90-$110 range over the next two years. Together, these reversals should ease global inflationary pressures significantly, allowing the Fed to follow up on its rate cut with further cuts that are likely to take the federal funds rate to 1 per cent,” the S&P report said.

However, the agency warned that despite slowing demand for oil in 2009, supply conditions could change significantly and lead to another spike in prices. “This will re-activate the inflationary pressures on the global economy, constraining the ability of central banks to use expansionary monetary policies to stabilise both the economy and the financial system,” it said.

The agency cautioned that investment flows into Asia-Pacific countries could slow and remain sluggish for a while. This, in turn, could affect funding of infrastructure and capacity expansion projects, both of which are critical to sustaining growth.

Expecting a gradual increase in credit costs, S&P is of the opinion that in Singapore and India, given the declining property prices, banks’ property related portfolios are expected to experience stress in 2009.

It expects the bearish market to take the shine off trading and fee incomes for many South and South East Asian banking systems.

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