India growth outlook clouded by oil price, inflation

While last week interest rate increase was expected, the Reserve Bank of India’s hawkish tone and warnings about risks to growth and inflation posed by high energy prices are clouding near-term prospects for Asia’s third-largest economy.

Eight rate increases since last March, with more on the way, have failed to kill off inflation that topped expectations at 8.3 per cent in February. They have, however, begun to crimp demand.

That threatens to worsen an investment climate already soured by bureaucratic delays and a government that has been crippled by a string of corruption scandals.

Industrial output

Sluggish investment, in turn, is slowing the addition of much-needed infrastructure and industrial capacity in an economy plagued by supply-side bottlenecks. Industrial output rose just 3.7 per cent in January, its strongest in three months.

“We really need infrastructure growth but you cannot create infrastructure at such high rates, so it’s a double whammy situation,” said Mumbai-based Man Industries, senior vice president K G Mantri.

Investment in India grew just 6 per cent in the December quarter, far behind the 18 per cent growth in the six months through September, according to Citigroup.The Reserve Bank of India warned recently of fragile investment conditions.

“Continuing uncertainty about energy and commodity prices may vitiate the investment climate, posing a threat to the current growth trajectory,” the RBI said.

Global portfolio investors, meanwhile, have fled India this year. The benchmark Bombay share index has tumbled 12 percent, making it the worst performing major stock market in Asia along with Japan, where the unfolding nuclear crisis threatens to add to a broader global environment of risk aversion. With global oil prices above $100 and threatening to remain elevated, fuel has replaced food as India’s key inflation worry.

New Delhi faces the dilemma of maintaining diesel and cooking fuel subsidies and taking the hit to government finances,  and inflationary choice to pass along price rises to end-users.

Neither option is attractive for a country that imports two-thirds of its energy. While India’s longer-term prospects remain bright, at least three major banks have recently cut growth forecasts for India in the year starting in April.