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Saturday, 24 January 2009

India growth to slow

NEW DELHI - A TOP Indian government panel cut its growth forecast for Asia's third-largest economy on Friday, blaming a battering from the global slowdown, and its chief said there was room for more cuts in interest rates.

In its review of the economy, Prime Minister Manmohan Singh's Economic Advisory Council said expansion would slow to 7.1 per cent for the current fiscal year to end March, from a previous estimate of 7.7 per cent.

The economy has faltered from growth rates of about 9 per cent in the past three years as high borrowing costs at home and recessions in key markets hit demand for manufactured products, automobiles and real estate.

But the overall fall-off still looks less significant than that in most developed economies and less than the halving of growth rates some now predict for Asia's other emerging colossus China.

Tremendous growth in the world's two most populous nations has been a major factor in world expansion in recent years but both now worry over the implications for jobs and poverty reduction of a slowdown in the developed world.

China's annual GDP growth fell to 6.8 per cent in the fourth quarter from 9.0 per cent in the third quarter and 13 per cent in all of 2007.

The Indian panel, headed by economist Suresh Tendulkar, said a 'painful adjustment to abrupt changes in the global economy' was underway.

Rising inflation in the first half of the fiscal year, when surging oil prices drove the most widely watched price measure to nearly 13 per cent, followed by the global financial meltdown piled on the misery.

Indian authorities have slashed rates, cut duties and rolled out extra spending over the last four months to limit the negative impact of the global slowdown.

'The December quarter was the worst. March quarter growth will also not be great. There will be some recovery from September onwards,' said Mr Saumitra Chaudhuri, economic adviser at domestic rating agency ICRA and a member of the panel.

'Perhaps one of the reasons why we are still having some decent growth is that the additional expenditure and other steps taken are in play.'

Rate cuts?
Before the release of the economic review, Mr Tendulkar had told Reuters in a telephone interview there was scope to reduce key interest rates but said the central bank may not announce a cut in its policy review next week.

The central bank reviews monetary policy on Tuesday and a Reuters poll forecast it would hold rates steady to assess the impact of recent aggressive reductions. But a sizeable minority of analysts bet on yet another cut.

'There might be a scope for reducing both the repo and the reverse repo. Unless they reduce the reverse repo it will be difficult. The reverse repo acts as a problem as banks park funds with the RBI,' said Mr Tendulkar.

'So I think they will have to reduce both.'

The repo rate, the key short-term lending of the Reserve Bank of India, stands at 5.5 per cent after being slashed by 350 basis points since mid-October. The reverse repo rate, at which the central borrows short-term funds from banks, stands at 4 percent.

The panel's new forecast is pretty much in line with analysts' expectations.

In a quarterly poll carried out by Reuters in December, economists expected economic growth to ease to 6.8 per cent in 2008/09, its slowest pace in six years.

They expected expansion to slow further to 6.2 per cent in 2009/10, highlighting the deterioration in prospects over recent months, but Mr Tendulkar's panel said growth may instead pick up - if there were signs of some improvement in the world economy.

It said growth may slowly improve in the second half of the next fiscal year and projected it to be between 7-7.5 per cent or somewhere above that.

India's ruling coalition will unveil an interim budget on Feb 16 ahead of a yet-to-be-announced general election in April-May, and the Congress party-led government is expected to give an overview of the economy and may announce fresh populist measures to woo voters ahead of the elections.

But analysts say a tight fiscal situation would restrict its ability to roll out eye catching measures.

The panel report cautioned that the combined fiscal deficit of states and the federal government could touch 10 per cent of gross domestic product in the 2008/09 fiscal year. -- REUTERS

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