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Source: media reports

Subsidies suppressing inflation

Subsidies suppressing inflation
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First Published: Tue, Aug 12 2008. 10 46 PM IST
Updated: Wed, Aug 13 2008. 12 59 PM IST
New Delhi: Global financial services and rating company Standard & Poor’s released its Asia Pacific macroeconomic outlook for the July to October quarter and the calendar year 2009 Tuesday.
For most of the countries in the region, it foresees continuing inflationary pressures and a persistence of the tight monetary stance by central banks around the region. Soaring food and fuel price inflation emerged as a major risk. For some countries, fiscal spending came under threat because of the high cost of subsidies. S&P Asia Pacific chief economist Subir Gokarn says that most of the Asian economies reflect the same macroeconomic pressures as India.
For India, the S&P outlook said “Continuing inflationary pressures indicate persistence of the tight monetary stance. Growth is slowing slightly, but the main concern is the worsening fiscal situation as subsidies are used to suppress inflation.”
Gokarn says that S&P expects the tightening of the monetary policy to reflect in the slowdown of GDP. He expects the same to grow between 7.5-8% in 2008. For 2009, the Indian economy is expected to grow between 7.3-7.8%. However, Gokarn says that this downturn is cyclical. In the long term, he expects the GDP to swing back to around 8.5%. “However, high interest rates and rising inflation are expected to hinder consumer spending and corporate investment in 2008 and 2009,” warns the S&P outlook.
Going forward, S&P expects the monetary policy stance to tighten and CRR and repo rates to be hiked in the October RBI announcements. It also expects that inflation numbers should start lowering in January resulting in a shift of stance by the central bank.
Also, the current account deficit is likely to worsen this year as the import bill rises on account of oil and food prices. It dipped to a deficit of $1 billion in the first quarter of 2008, due to a high oil import bill.
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First Published: Tue, Aug 12 2008. 10 46 PM IST