Think tanks see slower growth

The inflation based on the wholesale price index (WPI) is expected to hover around 7 per cent over the next few months. In the medium term, inflation will be on the decline, industrial growth will look up and money supply growth will slow, says the Institute of Economic Growth (IEG) in its monthly review of the economy for October.

WPI-based inflation is projected to come down to about 6.8 per cent over the next three months, while inflation based on the Consumer Price Index is expected to rise to about 5.5 per cent.

Money supply growth is expected to hover around 14 per cent over the next three months, while interest rates are expected to rise marginally. "High inflation, rise in credit demand and a hike in the US Federal Fund rate may put upward pressure on domestic interest rates in the coming months," it says.

The Investment Credit Rating Agency (ICRA) has estimated that WPI-based inflation will reach 7.3 per cent in December 2004 and 6.4 per cent by the end of the fiscal year.

In its latest Money and Finance Bulletin, ICRA has said that if prices are not revised upwards, there will be corresponding negative effects on tax receipts or on the profitability of state-owned oil companies.

It lowered the economic growth projection to 6.3 per cent this fiscal from its earlier forecast of 6.5-6.7 per cent due to an expected fall in farm output.

Though the farm sector is expected to see a decline of 1 per cent, the industry and services sectors are expected to grow at over 7.6 and 8.8 per cent, respectively, in 2004-05.

The Reserve Bank of India's (RBI's) assumption of interest rate stability in the mid-term review of the monetary and credit policy will depend critically on the government's ability to control fiscal deficit.

"At the moment, it appears that the government may far exceed the targeted fiscal deficit, which may lead to additional borrowings, and hence, upward pressure on interest rates. Since foreign exchange accumulation is expected to slow down, and restrain money supply growth, high international oil prices may still pose a problem for inflation management. If the problem becomes serious, the RBI may have to revisit its current monetary and credit policy," ICRA says in its report.

"Seasonal factors have brought down the prices of primary products like fruits and vegetables, however, rising fuel prices will have a spin-off effect on other prices in the economy in the coming months.

Iron and steel prices have also been rising rather sharply, but the government's fiscal and monetary steps to curb inflation may stifle any further rise in the inflation rate.

On industrial growth, the IEG says that though strong external demand continues to drive up industrial production, a possible decline in domestic demand because of a deficient monsoon and growing inflation may constrict the growth of industrial output in the short run. Increasing fuel prices may also put downward pressure on industrial production from the cost side. The index of industrial production is projected to grow by around 7 per cent over the next three months.