By S Chandra and C Massar/Bloomberg
Washington: India’s economic growth will slow “significantly” this year and higher interest rates will reduce inflation, according to the Asian Development Bank’s (ADB) top economist.
The country’s expansion will also be held back by a lack of infrastructure such as ports, roads and power generation, said Ifzal Ali, chief economist at the ADB. Gross domestic product will probably grow about 8%, down from 9.2% last year, he added. China, by contrast, won’t slow much, he said.
“We expect Indian growth to cool down significantly in the coming two years,” Ali, 58, said on 3 April. “In the process, I think inflation will be ironed out.”
The Reserve Bank of India is pushing borrowing costs higher to stem a surge in bank lending and contain inflation, which continues to exceed the central bank’s forecasts. Governor Yaga Venugopal Reddy unexpectedly lifted the benchmark rate to 7.75% on 30 March, the highest in more than four years.
The ADB’s estimate is at odds with the Indian government’s prediction last week that growth won’t slip below 9%. Prime Minister Manmohan Singh wants to further stoke the world’s second-fastest growing economy to create jobs and reduce poverty.
“I should be very cautious about the hype coming out of India,” Ali said. “With increasing incomes, the demand for food items is going up. The country cannot respond,” which suggests it is “reaching capacity constraints.”
Gradual Chinese Slowdown
China, the world’s fourth-biggest economy, will grow at a rate of about 9% “in the medium term,” Ali said. Efforts to rein in fixed investment, interest-rate increases and repeated steps to reduce excess liquidity will take time to work, he cautioned.
“Growth will decelerate in China, but very gradually,” he said. “Over the medium term, at best, China can slow the economy to about 9% a year, not the 7.5% that’s the goal of the government.”
The People’s Bank of China raised rates for the third time in 11 months on 18 March to slow investment growth and contain inflation. It has also ordered lenders to set aside more money as reserves and sold bills to control credit. China’s economy grew 10.7% last year, the fastest pace since 1995.
China’s government has said it will continue to increase the flexibility of its currency and allow the market to play a bigger role in deciding the yuan’s value. The currency may strengthen at a faster pace in 2007, Ali said.
The yuan’s appreciation will be “moving from a glacial pace to something a little faster,” he predicted. Faster gains may be permitted because export growth continues to “bolt ahead,” he said.
U.S. lawmakers and some manufacturers accuse China of keeping the yuan’s value artificially low to spur exports.