New Delhi: On the back of strong government spending and investment activity, the global slowdown will only have a modest effect on Indian economy whereas the country’s GDP is expected to ease to 7.8% this year, says global credit rating agency Moody’s in its latest report.
The report by Moody’s Economy.com noted that slowing exports and tight monetary policy are the key downside risks to expansion this year.
Further, government’s current priority to improve infrastructure and reduce poverty would witness strong demand for workers and household income grow at a stunning pace this year.
Public expenditure would receive a major boost in anticipation of the general election to be held in May 2009, the report said.
“Thanks to strong government spending and investment activity, the global slowdown will have only modest effect. India’s GDP growth is expected to slow to around 7.8% in 2008, and rebound to 8% the following year as the global economy rebuilds momentum,” the report titled ‘India Outlook: A Challenging Time Ahead´ noted.
Meanwhile, the Reserve Bank of India raised the Cash Reserve Ratio (CRR) by 0.25% to 8.25% in its Annual Monetary Policy. The new CRR would be effective from 24 May.
Pointing out that domestic demand is a key driver of expansion in the country, the report said that amid rapid wage growth, household demand would be solid.
However, strong inflation coupled with high borrowing costs would weigh on household budgets and dampen consumer spending.
Private consumption - which constitutes around 55% of the emerging giants annual GDP - is expected to climb 5% this year, slightly slower than the increase of 5.9% seen in 2007,“ the credit rating agency said.
In addition, the industrial production growth for this year “looks set to moderate to 7.8 per cent, a still-healthy figure, and quicken to 8.3 per cent next year as global demand recovers”.
Softer domestic demand amid tight monetary conditions along with slowing exports are both key risks to Indian manufacturers.
According to the report, the government would continue to record budget deficits in light of higher spending. However, the expected 10.7% rise in public expenditure this year should help provide much needed support to the economy amid a weakening external sector, it added.
In addition, the report said the country’s import growth would be around 10.2% this year and would touch 11.4% in 2009.