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Economists hint at slowdown in growth rate

Economists hint at slowdown in growth rate
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First Published: Tue, Apr 03 2007. 09 44 AM IST
After two years of 9% plus growth, the economy is likely to grow more slowly at 8-8.5% in 2007-08.
All signs point to this, say leading economists, with distinct signs of overheating surfacing. Any slowdown from the last two years would automatically translate into a one percentage-point decline, they add. Last week, for instance, the Asian Development Bank’s 2007 outlook forecast 8% growth for India this year.
“A number of macro indicators, such as inflation, current account deficit, stretch in the banking sector, and property prices are flashing red,” says Chetan Ahya of investment banking firm Morgan Stanley, indicating that there is a strong growth in demand unmatched by effective supply creation. The need to slow domestic demand in the near-term to reduce the macro overheating means that in the near-term, growth will inevitably have to slow to below 8%, Ahya added.
With inflation still continuing at near 6.5%, prompting the Reserve Bank of India to vigorously continue monetary tightening, interest rates for home loans have touched 12%, going higher for other retail loans. This, says Shashank Bhide of National Council of Applied Economic Research (NCAER), “is a clear signal that supply-side investments would have to be made carefully and that they would also become costlier.” This would automatically mean that growth expectations have to be moderated, Bhide said. While the NCAER research head is reluctant to put a figure to this moderation, he agreed that growth in this fiscal would slow down substantially from the council’s forecast for 2006-07. NCAER’s revised forecast for the year that just ended is 8.44%.
The strong lending growth and high inflationary pressures will continue into this year, worries Robert Prior-Wandesforde, an analyst at HSBC. As a result, “we are sticking to our forecasts of 7.8% GDP growth in 2007-08 and just 6.3% in 2008-09,” he said. “After a long period of above-trend growth, one should expect a period of below-trend growth of 6.5-7%. We need to see GDP growth fall below trend, before we can be confident that inflationary pressures will eventually subside on a sustainable basis.”
Ahya worries that the recent policy developments, particularly those related to special economic zones, large industrial projects, organized retail chains and infrastructure, “are reaffirming our concern that the supply response could remain weak in the near term”. Agrees Bhide: “Reforms in terms of our ability to attract investment in infrastructure will matter a lot.” The trump card thus remains in the hands of the policymakers.
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First Published: Tue, Apr 03 2007. 09 44 AM IST
More Topics: Economy and Politics | Indicators |