New Delhi: Finance minister Pranab Mukherjee on Wednesday warned volatile commodity prices may drag down the country’s annual economic growth to below an estimated 9% in this fiscal year, a week after indicating further rises in oil prices could shave 1 percentage point off Asia’s third-largest economy’s growth.
Pranab also said inflation was likely to remain at elevated levels between 7-7.5% during this period, at least a percentage point higher than the central bank’s end-March 2012 projection of 6%.
Oil prices rose to 32-month peaks in April due to tensions in the Middle East and North Africa, but a combination of a stronger dollar and signs of cooling in China has brought down prices.
ICE Brent crude futures were 39 cents lower at $117.24 a barrel by 1058 GMT, having earlier risen to as high as $118.43.
“Due to volatility in international commodity prices and other supply constraints, it may not be possible to achieve the growth rate of 9%, +/-0.25%, for the current fiscal,” Mukherjee said in a statement.
While private economists are increasingly trimming their 2011/12 growth forecasts for India, citing high inflation, rising interest rates and high oil prices, the government has not yet officially revised down its growth forecast.
India’s central bank has forecast an annual economic growth of around 8% for this fiscal year on the assumption that crude oil prices would average $110 a barrel over the full year.
While higher oil prices are threatening to slowdown the economy, they are posing inflationary risks.
Headline inflation surged to nearly 9% in March, well above forecasts, prompting the central bank to raise key rates by a bigger-than-expected 50 basis points to tame stubbornly high inflation last week.
The Reserve Bank of India (RBI), which has raised its main operating policy rate by 250 basis points since March 2010 in nine moves, expects the headline inflation to remain around 9% in the April-September period.
The RBI governor Duvvuri Subbarao on Monday reiterated India will maintain its anti-inflationary stance even if that means sacrificing growth in the short term.
High inflation is seen preventing New Delhi from passing on high global crude prices to domestic consumers, a decision that has a bearing on its fiscal health.
A ministerial panel meeting to consider raising fuel prices was deferred on Tuesday, signalling the government’s reluctance to tackle a political hot potato that is needed to bolster public finances, but which could also stoke inflation.
Any hike in prices of diesel and gasoline is expected to be small, given the political sensitivity of such a move for hundreds of millions of poor who form the bedrock of support for the government.
Even a small rise would help limit the government’s fuel subsidy burden to a budgeted $5.2 billion for 2011/12 and help it meet its fiscal deficit target of 4.6% of gross domestic product.
But the government also appears wary of the effect of raising fuel prices on headline inflation.
Even a 10% hike in petrol and diesel prices would add around 70 basis points directly to headline inflation, brokerage Nomura said in a report late last month.