New Delhi: Booming India is reeling from a flurry of bad financial headlines, suggesting the outlook for the world’s second fastest growing major economy is not as rosy as it was, analysts say.
Economic growth is losing pace and inflation is on the rise, meaning that the country’s central bank, the Reserve Bank of India (RBI)—which has hiked interest rates nine times since 2004 to tame prices—has little room to loosen monetary policy to spur activity, they say.
“The picture of very strong growth and low inflation in India is starting to give way to one of slowing growth and rising inflation,” said Robert Prior-Wandesforde, an economist at HSBC Holdings Plc. in Singapore.
Last Friday, inflation in Asia’s third largest economy hit a nearly 10-month high of 5.02%, pushing through the central bank’s ceiling of 5% for this fiscal year.
Adding to the gloom has been a 25% slide since 10 January in the country’s benchmark Sensex share index—whose 47% jump last year made it one of the world’s top performers—as foreign investors have bailed out.
“With the (global) economic turbulence, you’re seeing a lot of risk aversion,” said Amitabh Chakraborty, equities president of Mumbai’s Religare Securities Ltd.
Also, the Congress-led United progressive Alliance government, which faces general elections in little more than a year, is storing up fiscal trouble with its Rs60,000 crore loan bailout for farmers, big civil service pay hikes and tax cuts announced late last month in its populist, poll-geared Budget, economists say.
“We think the fiscal deficit will increase due to the spending pressures,” said Goldman Sachs Group Inc. economist Tushar Poddar.
Economic growth is forecast by the government to slow to 8.8% in this fiscal year to 31 March 2008 from 9.6% last year—the first deceleration in three years.
Some economists project growth could fall to as low as 7% next year due to the US-led global slowdown, aggressive monetary tightening and a sharp rise in the rupee’s value against the dollar, which has hit exports.
A growth rate of 7% would still be enviable by anaemic Western levels but is too low for India, where analysts say double-digit expansion is needed to help hundreds of millions escape a grim poverty trap.
The stock market’s slide has also cast a cloud over plans by firms to raise a projected $15 billion (Rs60,750 crore) in initial public offerings (IPO) this year—nearly double the record $8.3 billion raised in 2007.
Already, two high-profile firms have pulled their IPOs, including Emaar MGF Land Ltd, which abandoned its bid to raise $1.6 billion, citing “indications of a US recession and global meltdown.”
IPOs are key to expansion as much of the funds raised would be invested in plant and machinery, and improvements in the country’s dilapidated infrastructure such as its potholed roads, shabby ports and unreliable power.
Lengthy blackouts even in big metropolitan centres such as New Delhi are routinely cited by economists as major growth constraints.
While India’s economy is better insulated than many other Asian nations from the global slowdown because it is not so heavily dependent on exports, it is not immune to the chill financial headwinds, analysts say.
A lot of economic growth has been driven by risk capital, especially from the US, which is slowing as foreign investors repatriate funds amid fears of a US recession, said Religare’s Chakraborty.
For the time being, the government and RBI are making checking inflation their priority.
The central bank and the government are “signalling the risk to inflation is a bigger worry than the risk to growth,” said JPMorgan Chase and Co. analyst Rajeev Malik.
Soaring world commodity and crude oil prices have alarmed RBI while the government sees cutting inflation as crucial to its political fate, analysts say.
Inflation has been blamed as a key factor in several state poll drubbings for Congress, which owes its 2004 general election win to support from India’s poor masses—hardest hit by price rises.
Prime Minister Manmohan Singh last month called inflation “the cruelest tax” as it hits the poor the hardest.