New Delhi: India’s economy will find it “tough” to grow at 9% in the current fiscal year if crude prices remain high, the finance ministry’s chief economic adviser said on Wednesday.
In February, the government had forecast India’s annual economic growth in the range of 8.75% to 9.25% for the 2011-12 fiscal year that began in April.
But private economists have been trimming their 2011-12 growth forecasts for Asia’s third-largest economy, citing high inflation, high oil prices and the prospect of higher interest rates.
“Yes. 9% is going to be tough especially if crude prices remain high. That is the most important factor that is blighting the chances,” Kaushik Basu told Reuters.
Brent crude prices were above $122 a barrel on Wednesday after the dollar weakened against the euro and fears eased over further monetary tightening in China, the world’s No. 2 oil consumer.
The Reserve Bank of India (RBI), which on Tuesday raised key rates by a sharper-than-expected 50 basis points to tame inflation, said it expects the economy to grow around 8% in this fiscal year, if oil prices averaged $110 a barrel for the year.
A $10 a barrel rise in crude oil prices has the potential to shave off India’s growth by 0.3-0.5 percentage points, brokerage and investment group CLSA said in a note last month.
High global crude prices also run the risk of aggravating India’s stubbornly high inflation that stood at 8.98% in March, if the government decides to pass on high global prices to domestic consumers.
A failure to adjust domestic fuel prices in line with global prices will have a bearing on the government’s fiscal health.
Basu backed the RBI’s view that taming inflation by sacrificing growth in short-term is important to sustain growth in the medium-term.
“In the medium-to-long term, controlling inflation is in fact a constituent of better growth. On this, there is really no difference I think in any part of the government with the RBI that the two objectives go hand-in-hand.”