Finance minister P. Chidambaram signalled that India’s growth rate could slow this fiscal year and that the government is prepared to ban exports in more industries in a bid to staunch rising inflation.
He said “anything between 8% and 9%” gross domestic product (GDP) growth in the year ending 31 March 2009 is “welcome and acceptable”. Some economists forecast that India’s economy, after averaging growth just shy of 9% for the past five years, may slow to about 7% this year because of the slowdown in the global economy.
Chidambaram said in an interview that it was too early to make a specific forecast because the direction of the economy would be clearer after the monsoon and the harvest. But, he added, “We must aim at 9%, as I will, and we must be happy if it’s between 8% and 9%.”
Aiming high: Chidambaram says anything between 8% and 9% growth in the year ending 31 March 2009 is welcome and acceptable. (Ramesh Pathania / Mint)
India’s GDP growth rose by 9.6% in the year ended 31 March 2007, and is estimated to have grown by 8.7% in the year ended 31 March 2008.
Chidambaram said soaring prices of rice and other basic food items are a worry.
“It is a matter of concern in a developing country and in a country where a large number of people are poor and the bulk of household expenditure is for food,” he said.
High food prices also are fuelling rising inflation, as well as inflationary expectations. Wholesale price inflation is running in excess of 7% on an annual basis.
India’s rising consumption, as household incomes increase, also is driving inflation higher. The upper limit of the government and central bank’s comfort zone for inflation is close to 5%.
“Inflationary expectation is driving prices,” he said. “So, we have to break this expectation by telling people that prices will moderate, they should not buy more than what they need to buy and they should not pay more if they think that the price rise is unjustified.”
Inflation is also being stoked by a mismatch of supply and demand, he added, and by cartel-like behaviour in some sectors of the economy.
The Monopolies and Restrictive Trade Practices Commission, India’s antitrust regulator, has begun some inquiries in the rubber, cement and steel sectors, he said.
The government also has cut some exports and taken action to reduce food prices, such as banning the export of rice other than basmati, and increasing the minimum export price of basmati rice, one of India’s signature exports.
The government would consider further bans, Chidambaram said, even though he acknowledged that it goes against the principles of free trade. “As a short-term measure...we will consider such bans, too,” he said.
India’s ministries of steel and commerce have proposed some export bans in the steel sector, he pointed out. But further bans on food exports are less likely since “all export of food items is virtually banned” already, he said.
Indian authorities have been moving to stem inflation. Last Thursday, India’s centralbank effectively restricted the amount of money banks can lend.
The move strengthened the rupee on Monday. The dollar in early trading stood at Rs39.84 compared with Rs39.93 on Thursday. (Financial markets were closed on Friday for a holiday.)
Despite India’s high inflation, the much-needed build-out of the country’s infrastructure isn’t being hurt, Chidambaram said. “All the indicators are that investments that are in the pipeline continue to remain buoyant and robust,” he said.
And despite an 18% drop in the country’s benchmark stock market index this year, Chidambaram said India still remains a good place to invest. He pointed out that in the year ended 31 March 2006, investor returns from the stock market were 40%, as they were for the following fiscal year.
In the year to 31 March, despite recent declines in the stock market, the overall annual return has still been about 27%, he said.
“This still remains one of the most attractive markets for any investor,” the finance minister said. “The question is no longer, ‘Shall I invest in India?’ The question is, ‘Can I afford not to invest in India?’”
The divergence between India’s growth rate and that of its neighbour China is a cause for concern, he said. China recently reported first quarter GDP growth of 10.6%.
“We want to catch up with China,” said the finance minister, pointing out the distance between the two countries’ growth paths was increasing. But, catching up requires “greater political consensus on the needed reforms” in India.
India is governed by the United Progressive Alliance, an uneasy coalition between the Congress party and others including the Communist parties which tend to oppose reforms that would further liberalize the economy.
Without opposition or the need to build consensus, China’s non-democratic government can be quicker in spurring economic growth, he said.
“I’m talking about the fact that they are in the position to take some decisions which we are not,” said Chidambaram. “We have to follow a process that is more consultative, more deliberative and more amenable to judicial scrutiny.”
Vibhuti Agarwal contributed to this story.