Even as inflation is expected to moderate from December, there is a strong possibility that India would fail to achieve its revised GDP growth target, ING Vysya Bank chief economist Deepali Bhargava tells Puneet Wadhwa. Edited excerpts:
The markets have been spooked by growth concerns at the global level. Are the fears overdone?
We feel the reaction is completely in line with the fundamentals, and, hence, justified. Going forward, we may see further correction in the export-dependent sectors, given the growth concerns in the US and the euro region, both major trading partners of India.
Domestically, too, the situation indicates a slowdown. Credit growth in this financial year has been muted, given the rising interest rate scenario. Other factors like auto sales also indicate a correction. Overall, we see some moderation in growth, indicated in the market sentiment.
However, good monsoons and a fall in global commodity prices may help reduce inflation in the medium term, which may check further downside from here.
We will be watchful of how the fiscal scenario pans out in various economies, including India. With the already high debt-GDP ratio and the probability of stimulus going higher, fiscal numbers in major economies may need to be observed.
In India, however, rising subsidy bills on food, fertilisers and oil may prompt the government to overshoot the fiscal target this year.
High inflation has been another area of concern. Do you see that tapering any time soon? Do you expect the Reserve Bank of India (RBI) to raise key rates in the September policy review?
Yes, inflation has been a major concern in India for some time now. We see inflation moderating from December. Good monsoon and a correction in commodity prices may aid this . However, we expect RBI to increase rates by 25 basis points in the September policy review.
How strong is the possibility that India may not be able to achieve the revised gross domestic product (GDP) target this financial year? What, according to you, will be the implications of this?
We see a strong possibility that the revised GDP growth target will not be achieved, as low investment growth, falling business confidence, high rate of inflation and lower export growth will impact GDP projections. However, domestic demand continues to hold, which may limit the downside.
Where do you see the bond yields heading? What is the outlook on credit growth?
Bond yields would be range-bound in the near term (range 8.20-35). However, fiscal concerns in the second half of 2011-12 and the outlook that inflation is likely to moderate from
December may take yields to a high of 8.50 on the 10-year benchmark. The credit growth is likely to improve in the second half due to seasonal demand. But the target of 18 per cent may be missed.
