Indias Economic Growth to Ease in 2008: ADB

HONG KONG, CHINA - India's economic expansion will moderate in 2008 as the central bank keeps monetary policy tight and the Government takes measures to rein in inflation ahead of parliamentary elections early next year, the Asian Development Bank (ADB) says in a new major report.

ADB's flagship annual economic publication, Asian Development Outlook 2008 (ADO), forecasts that following a slowdown in 2007, economic growth will moderate to 8.0% in fiscal year (FY) 2008. Growth will rebound to 8.5% in FY2009 on the back of a pick-up in consumer spending and more accommodative monetary policy. India's economy grew at 8.7% in FY2007.

"While the pace of growth has faltered, the economy has considerable momentum. This sense of dynamism will lift the economy," says ADB Chief Economist Ifzal Ali. "The country needs to meet the macroeconomic challenges to ensure the current deceleration remains mild in the face of global market turmoil and economic slowdown."

The report highlights growth outcomes in India over the next two years will partly hinge on the timing and scope for relaxing the current tight monetary policy. This in turn will be shaped by two key factors: the outturn in domestic food production and trajectory of global commodity prices.

Growth in private consumption will remain buoyant at just over 6% in FY2008, underpinned by strong wage gains, income tax exemptions, debt waiver for farmers in the FY2008 budget, high prices for cash crops, and pay hikes for civil servants.

However, despite strong investor enthusiasm, an anticipated slowdown in fixed investment will account for part of the deceleration in overall economic growth. The postponement of some initial public offerings in early 2008 is one indicator of domestic companies scaling back expansion plans.

ADO says domestic prices of food and fuel will be critical in determining wholesale price inflation, which is projected at 4.5% in FY2008. It warns that inflationary pressures will persist as the local supply of foodgrains and vegetables is expected to remain tight in FY2008 due to subdued sowing of the winter crop in 2007 and possibly, the summer crop in 2008.

ADO expects inflation to be held at 5% in FY2009. Easing of international prices of non-oil commodities, including foodgrains, would help offset price increases of domestic petroleum products ahead of elections which may ease inflation pressure in FY2009.

While exports of low-profit margin sectors like textiles and handicrafts were hurt by an appreciation of the rupee in 2007, exports of higher value-added sectors like business services and capital-intensive manufacturing exports continued to grow. The report expects the rupee-dollar exchange rate to be relatively stable in FY2008 and FY2009.

ADO expects exports to grow strongly at 16% in FY2008 as developed markets further open up to India's high-tech service exports and market diversification deepens. Import growth will also continue to be rapid as the country imports capital goods and intermediates to sustain high levels of investment. As a result, the current account deficit is expected to be 2.2% in FY2008 and 2.6% in FY2009.

The report lists supply shocks beyond the 2007 and 2008 agricultural sowing seasons, rising food prices, tighter monetary policy and a global economic slowdown as major downside risks to the buoyant growth forecast.

India's strong dynamism has helped it move to a higher sustainable growth path, the report says. Looking ahead, it notes key structural challenges include boosting domestic agriculture, improving labor productivity, establishing a new fiscal adjustment roadmap and continuing structural reforms.