India’s high growth level may not sustain and government’s reforms may run out of steam as the main parties concentrate on winning support ahead of elections due in 2009, a consulting firm reported on Tuesday.
Noting that the forecasts of GDP growth for fiscal 2007-08 (ending March) are being revised downwards to 8.4-8.6 per cent (growth in 2006-07 reached 9.4 per cent), Oxford Analytica says this reflects the impact of a credit squeeze initiated by the RBI to combat inflation, which reached 6 per cent earlier this year.A summary of analysis by Oxford Analytica, which claims to have 1,000 scholars, was posted on the website of Forbes magazine.
Positive side
On the positive side, it says, growth in agriculture, a perennial under-achiever, may accelerate following a favourable monsoon and there are also indications that a period of ‘jobless growth’ is over, with rapid expansion in employment opportunities catching up with rising rate of participation in the labour force. Another positive sign is fast growth of capital goods industries and an expansion of infrastructure, which would support the economy in the long run. Besides, foreign portfolio flows are strong adding to local resources.
A recession in developed economies might increase outsourcing work to India, it says, noting that services, which account for over half of economy, continue to grow around 8 to 10 per cent. Added to these are remittance flow of between US 25 billion dollars and US 28 billion dollars which help the current account deficit to close to 1-2 per cent of GDP.
Discussing concerns, the report says while the RBI has now brought inflation down to 3-4 per cent, it is unlikely to loosen monetary policy in the short term. Its strategy of sterilising very large inflows of foreign currency also has the consequence of holding up interest rates. The credit squeeze, it says, has been felt particularly severely in manufacturing, where growth fell to 8.6 per cent year-on-year in the second fiscal quarter from 12.7 per cent in the same period last year.
