New Delhi: India’s attention swung from one number—the support of the 272 Lok Sabha members the government needs to stay in power—to other, more economy-related numbers on Friday and these showed that its macro-economic outlook had taken a turn for the worse and could result in the downgrading of India’s sovereign credit rating and increasing the cost of its foreign loans.
Inflation, as measured by an increase in the wholesale price index, rose to 11.89% in the week ended 28 June, compared with 4.42% for the same period in 2007. And, the country’s industrial growth in May dipped to 3.84%, the lowest in six years. It was 10.59% last May.
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India’s benchmark index, the Bombay Stock Exchange’s 30-stock Sensex, fell 456.39 points, or 3.3%, to 13,469.85.
Inflation will continue to stay in the double digits till December and soaring prices will hurt the country’s economic growth slightly, according to Shubhashis Gangopadhyay, adviser to finance minister P. Chidambaram.
“We are trying to cope with the impact of high oil prices and inflation,” he said.
The country’s central bank, the Reserve Bank of India, or RBI, has tried to tighten monetary conditions by raising the cost of credit and other measures but inflation continues to march on. N.R. Bhanumurthy, associate professor at the Institute of Economic Growth, said an-other round of monetary tightening might aggravate the slowdown.
“The impact of high food prices, both international and domestic, has gone down. The more serious issue is the adverse impact of inflation on manufacturing. The deceleration in manufacturing is primarily due to the increase in fuel prices and the interest rate hike by RBI in January.” He said that any move that “constrains growth is ill-directed”.
LITTLE COMFORT (Graphic)
A report by credit rating agency Standard and Poor’s warned of a likely economic deceleration, “especially if high inflation leads to higher real interest rates and weakening investment demand and consumer borrowing”. Rising inflation and worsening fiscal deficit and current account on the balance of payments may lead to cut India’s sovereign credit rating to “speculative grade” said Takahira Ogawa, a credit analyst with the firm.
According to it, measures such as the farm loan waiver, higher oil and fertilizer subsidies and pay hike for government employees are likely to push up the consolidated fiscal deficit in 2008-09 to 9% of the gross domestic product from 6.5% estimated earlier.
Reuters contributed to this story