India growth forecast up, but still seen at 7-yr low

India growth forecast up, but still seen at 7-yr low

Mumbai: India’s economic prospects have brightened in recent months, prompting analysts to raise their 2009-10 growth forecast, but the economy is still expected to post its weakest performance in seven years.

Analysts in a Reuters poll raised their median forecast for growth in Asia’s third-biggest economy to 6.3% for the year to the end of March 2010 from a forecast of 5.7% in a similar poll three months ago.

However, that is below 6.7% in 2008-09 and would be the weakest rate since the economy grew 3.8% in 2002-03. The government expects growth to pick up to 7% in 2009-10, or FY10, as the economy recovers from the global downturn.

“Growth is expected to remain low in FY10 owing to the weakness in consumption and investment spending," said Gunjan Gulati, an economist with JP Morgan Chase.

“External demand also remains sluggish, as evident from still contracting exports."

Growth will pick up to 7.2% in 2010-11, helped by stimulus measures including large rate cuts, increased government spending and tax cuts, the poll shows.

“Demand-led domestic recovery and a gradual pick-up in global economic activity would make it possible for growth to rebound in FY10/11," Rupa Rege Nitsure, chief economist at Bank of Baroda, said.

With signs that the worst of the slowdown is over, most economists think the central bank has finished cutting interest rates after aggressively lowering them between October and April.

Indeed, sharper growth in 2010 will prompt the Reserve Bank of India (RBI) to start raising interest rates again, the poll showed, with most forecasts expecting a move around the middle of the year.

The central bank has cut its lending rate 4.25 percentage points since October to 4.75%.

For its part, the government has ramped up spending to support the economy, which is expected to swell the fiscal deficit to an estimated 6.8% of GDP, the highest in 16 years..

“A big concern would be the states’ deficit, which could sizeably inflate the consolidated deficit of the government," JP Morgan’s Gulati said.

Wholesale price inflation, the most watched price barometer in India, is forecast to accelerate sharply from 2.0% in 2009-10 to 5.5% in 2010-11 as economic activity picks up domestically and globally.

Wholesale prices started falling from a year earlier in June, reflecting high prices last year rather than deflationary pressures.