Hong Kong, China (BBN)- India’s economy will experience a marked slowdown in the 2008 and 2009 financial years, ending its run of five consecutive years of very high growth, the Asian Development Bank (ADB) says in a new report on Tuesday.
The Asian Development Outlook 2008 Update (ADO Update) forecasts India’s growth rate to decrease to 7.4 per cent in FY2008 and decelerate further to 7.0 per cent in FY2009.
The new figures are down on ADB’s April forecasts of 8 per cent and 8.5 per cent respectively, and much less than the impressive 9 per cent growth posted in the last fiscal year ending March 2008.
The report notes that current developments are challenging India’s strong growth performance of recent years. Emerging capacity constraints, continued rapid expansion in credit, and an increase in global commodity prices have combined to trigger a spike in domestic inflation.
The report warns that global commodity prices and domestic demand growth supported by price subsidies will continue to place upward pressure on prices. Further, the government’s attempts to rein in inflation through monetary policy tightening combined with ad hoc interventions, including reduction in customs duties and bans on export of essential commodities, are having limited impact.
Real interest rates have actually fallen and the projections for the inflation rate, based on the wholesale price index, have been adjusted upward to 11.5 per cent in FY08 and 7.5 per cent in FY09, the ADB said in a press statement.
Gross domestic product (GDP) growth at 7.9 per cent in the first quarter of FY08 (April-June), saw the slowest expansion in three and a half years. The slowdown was broad-based.
The most pronounced slide was in industry, dragged down by a halving in the manufacturing growth rate, the statement added.
Growth in investment will continue to be limited by faltering business confidence, fewer options for foreign financing owing to a drop in risk appetite by foreign financial institutions, growing difficulties in securing domestic bank financing, and the need to maintain tight monetary conditions and high interest rates to bring down inflation, the ADB observed.
The report also notes that the escalation in oil, fertilizer, and food subsidies, as well as other off-budget liabilities has created large fiscal imbalances.