New Delhi: India’s economy is expected to expand 7.3% in 2010 and 7.6% in the following year, with the recovery that’s now underway “modestly hampered” by a poor monsoon, the Organisation for Economic Cooperation and Development (OECD) said on Thursday.
And given the resurgence of inflationary pressures “so early in the recovery”, monetary policy will need to be tightened “fairly soon”, the group of 30-high income countries said in its Economic Outlook report.
OECD projected India’s gross domestic product, or GDP, growth rate at 6.1% in 2009 after subtracting around 0.5 percentage point from the estimate on account of the impact of the deficient monsoon.
The Reserve Bank of India (RBI) signalled its exit from an easy monetary policy regime last month by increasing the statutory liquidity ratio, or proportion of deposits that banks need to invest in government securities, and ending two special refinancing facilities that had been introduced as part of measures to stimulate economic growth.
Starting in October 2008, the central bank rapidly cut its main lending rate and reduced the cash reserve ratio, or proportion of deposits that banks need to keep with it, to boost liquidity. Acording to RBI’s forecast the economy is expected to grow 6% in the current fiscal year, with inflation touching 6.5% by March.
OECD said the rise in inflation stemmed from shortfalls in agricultural output caused by the poor monsoon and a turnaround in international commodity prices. Since mid-2009, the inflation rate has picked up sharply, most notably for consumer prices, which, by September, were up by around 11.5% over a year earlier. Wholesale prices have also begun to rise again, after remaining in the negative territory for three months till August. OECD expects both wholesale and retail price inflation to touch 7% in 2010. It also cautioned against a “very expansionary” fiscal policy followed by India. The government has projected a fiscal deficit of 6.8% of GDP in 2009-10.
The group said in its report that the projected economic recovery will facilitate some improvement in the fiscal situation.
Yet, “given that much of the increase in government expenditure over the past year or more has been permanent—most notably the large rise in public sector wages granted in the 2008-09 Budget —only a modest narrowing of the deficit is projected”.
It also said that the long-term government bond rates had continued to trend up over the course of 2009, reflecting pressures from higher government borrowing and the inflation bounce.
“Given that activity is expected to strengthen relatively quickly and that the recovery is likely to have begun with only a modest level of slack in the economy, delayed fiscal consolidation will also contribute to higher inflationary pressures,” OECD said in its report.