India growth dips as rates hit investment [FT]
By Joe Leahy in Mumbai
Published: August 29 2008 10:34 | Last updated: August 29 2008 16:52
India’s economy decelerated to its slowest growth rate in three-and-a-half years in the first quarter of this fiscal year, as higher interest rates forced companies to begin easing back on investment.
Government data showed gross domestic product growth dipped to 7.9 per cent year-on-year in the three months to the end of June, compared with 8.8 per cent a quarter earlier, jeopardising its ranking as the world’s second fastest growing large economy after China.
The slowdown came as the central bank, the Reserve Bank of India, gave warning in its 2007/2008 report that it was still worried about inflation and maintained its hawkish stance on monetary policy.
Tushar Poddar, an economist at Goldman Sachs in Mumbai, said: “You’ve had a big increase in interest rates and already you have seen a slowdown in corporate investment plans. That’s not going to change until we see a meaningful decline in interest rates.”
Economists expect India to continue to lose steam in the coming months as it struggles to contain inflation that has tripled this year to 13-year highs of 12.4 per cent in mid-August. The RBI has been forced to raise interest rates to a nine-year high of 9 per cent, prompting corporates and consumers to begin curbing borrowing.
The economic headwinds have come as the Congress party-led ruling coalition is preparing for an election before May next year.
Finance minister Palaniappan Chidambaram said he still expected growth of about 8 per cent this year, a rate he said was “not something to be scoffed at”.
“There is a high degree of savings and investment,” he added. Most economists are predicting growth for the full year ending next March of between 7 and 8 per cent.
World Bank estimates show that Russia could overtake India this year as the second fastest growing large economy with expected growth of 7.1 per cent against India’s 7 per cent, Bloomberg reported.
In its annual report, the RBI warned that although the economy was slowing, domestic demand remained strong, helped by an expansionary government budget. It said: “Inflation risks have increased sharply and appear to be persistent.”
Goldman Sachs’s Mr Poddar said growth would be in the region of 7.8 per cent this year, despite the potential for further interest rate rises. This was because of a government fiscal stimulus, indications of a healthy monsoon and a resurgence in industrial growth.
But Amar Ambani, vice-president of research at India Infoline, expected inflation to soon breach 13 per cent, driving down growth to 7-7.5 per cent.
The Bombay Stock Exchange benchmark Sensex index, down a third this year, was 3.7 per cent higher at 14,564.53 on Friday. The yield on the key 10-year bond fell 7 basis points to 8.70 per cent and the rupee gained 0.4 per cent to Rs43.935 against the dollar. |
