Inflation may hit 6%, GDP around 6.2%

Inflation may hit 6%, GDP around 6.2%
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First Published: Tue, Dec 15 2009. 10 07 PM IST
Updated: Tue, Dec 15 2009. 10 07 PM IST
Upside surprises in Indian industry may offset a weak summer crop, likely resulting in FY10 gross domestic product (GDP) growth of 6.2% year-on-year (y-o-y) and an estimated recovery of 7.8% y-o-y in FY11. The key concern, however, will be inflationary pressure, if food and fuel prices continue to rise, and continued dollar inflows. This could likely make management of inflows a challenge.
On a positive note, clarity on divestments would help alleviate the fiscal situation.
While loan growth remains anaemic, better-than- expected Index of Industrial Production (IIP) data and rising Wholesale Price Index (WPI) will likely prompt tightening by early 2010. On the rupee, our view remains that of a structural appreciation in the currency.
Lower agriculture output will likely be offset by stronger industrial production. With the 2009 monsoon being the worst in decades and the year being declared as an all-India drought year, overall agriculture growth is likely to come in at -4%. However, unlike past droughts, the impact should be muted due to: (1) ongoing stimulus measures, namely the National Rural Employment Guarantee Scheme, the farm loan waiver and the pay revision, and (2) the impact of new hydrocarbon discoveries coming on stream.
GDP will likely moderate in FY10, before posting a recovery in FY11. Despite the momentum in industrial growth, overall GDP in FY10 is likely to come in at 6.2% against 6.7% in the previous year. With the improvement in the macro environment, we expect the investment cycle to regain momentum, thereby resulting in FY11 GDP growth coming in at 7.8%.
We expect rates to be tightened by 125 basis points over the year.
While current trends are still benign, inflationary pressures will likely mount in 2010. We expect the headline WPI to rise to 6% levels by March.
Rohini Malkani is an economist with Citi India
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First Published: Tue, Dec 15 2009. 10 07 PM IST
More Topics: Indicators | GDP | Inflation | IIP | Agriculture |