Inflation to bring growth down

Inflation, fuelled by surging energy and commodity prices and interest rate hikes by the Reserve Bank, could pull down India's economic growth from the projected eight per cent to 7.8 per cent this fiscal.

"High oil prices, strong input costs and a depreciating Rupee continue to exacerbate inflationary and other pressures. High interest rates, along with a slowing global economy, will trim GDP growth to 7.8 per cent in 2008-09," Standard & Poor's Asia-Pacific Chief Economist, Subir Gokarn, said in a statement here today.

The inflation rate was expected to be around 8.5 to nine per cent during this fiscal.

Rising inflation, a forecast slowdown in economic growth, and turmoil in the global financial markets have dampened investor confidence and led to foreign capital outflow.

"This has led the rupee, which was already under pressure from a rising oil import bill, to depreciate as sharply this year as it appreciated in 2007," the statement said.

As global market conditions become more stable and oil prices moderate, the rupee could appreciate to around Rs 41-41.5 vis-a-vis the US dollar towards the end of the fiscal year, the statement added.

The country's current account deficit was expected to swell to about 2.6 per cent of GDP.

"Fiscal improvements in the past few years are likely to be reversed this year, due to a surge in oil, fertiliser and food subsidies," the statement also said.

The Central government's fiscal deficit (including off-budget liabilities) is an estimated 6.2 per cent of GDP, compared with the budgeted 2.5 per cent (excluding off-budget liabilities). The consolidated fiscal deficit of Centre and states should touch 8.5 per cent of GDP, the statement said.

Crisil's chief economist, D K Joshi, said "after four years of noteworthy fiscal consolidation, a reversal is on the cards in 2008-09."

The fiscal improvement was supported by very strong revenue gains, particularly from direct taxes.

"These gains are now being offset by the sharp surge in the subsidy burden from petroleum products and fertilisers," Joshi said.

The 6th Pay Commission and the farm loan waiver announced in the Union budget by the Finance Minister would add to the fiscal stress this year, he said.

However, despite the deterioration, the situation is not yet as bad as it was in the beginning of this decade when the consolidated deficit of the centre and states was above 10 per cent of GDP, he said.