Price of Inflation: Crisil deflates 2008-09 growth forecast to 8.1%

Earlier 8.5% estimate assumed RBI would cut interest rate in response to slowdown; this is now ruled out as price rise trend is way above 4.5-5% comfort zone

Credit rating agency Crisil today pared the country’s economic growth forecast for the current fiscal to 8.1 per cent from 8.5 per cent earlier, given the inflationary expectations that rule out any interest rate cuts by the Reserve Bank of India (RBI). It has forecast inflation to stabilise at 5.5 per cent for the full financial year 2008-09 from over 7 per cent now.

Explaining the rationale behind the reduced growth estimate, Crisil principal economist Dharmakirti Joshi said, “Our earlier gross domestic product (GDP) forecast of 8.5 per cent had assumed a cut in the policy interest rate by the central bank (RBI) in response to the slowing economy. This is now ruled out since current inflation and inflationary expectations are way beyond the RBI’s comfort zone of 4.5 to 5 per cent.” Blaming the current spate of rising prices on primary commodities and oil — a worldwide phenomenon related to the supply crunch — Crisil expects inflation to average 5.5 per cent in 2008-09 under a normal Monsoon scenario. If, however, the Monsoons are sub-normal and agricultural production falters, the inflation scenario will worsen.

Despite this moderation, the overall growth scenario is expected to remain strong with the investment component of aggregate demand remaining the main driver of the economy. As for the slowdown in external demand due to the impact of the US subprime credit crisis, it will partially be offset by domestic private consumption demand. Crisil expects the growth of private consumption and investment to be 5.9 per cent and 14 per cent respectively.

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Assuming a normal Monsoon this year, the rating agency estimates agriculture to grow at 3 per cent. The sectoral forecasts for industry and services have been pegged at 8 per cent and 9.8 per cent respectively. “The Reserve Bank of India (RBI) has consistently maintained that containing inflation within its target zone is its primary objective,” Crisil noted. “Given high inflationary expectations, the RBI has already raised the cash reserve ratio (CRR) by 50 basis points (bps) ahead of the (April 29) monetary policy announcement. This will exert upward pressure on interest rates.” In this backdrop, it has revised the 10-year G Sec rate upwards to 7.7-7.9 per cent by March 2009.

Crisil also warned that as the GDP growth moderates, tax collection growth may decline and put pressure on the government’s fiscal figures. There will be a further loss of revenues on account of the recent duty cuts undertaken to tame inflation while the subsidy bill on fuel and fertilisers is set to rise due to the global food and crude price scenario. Based on these factors, Crisil has revised its fiscal deficit forecast for 2008-09 upwards to 3.9 per cent of GDP. It also expects the rupee’s exchange rate to hover around 38.5-39 to the dollar.

Agencies GDP Growth*

Crisil 8.1

Citigroup 7.7

IMF 7.9

ADB 8.0

The Economist 7.5

Morgan Stanley 7.0

JP Morgan Chase 7.0

HSBC 7.0

UBS 8.2

Deutsche Bank 8.4

*GDP Growth Forecasts, 2008-09

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