New Delhi: India expects its economy to expand 8.7 percent in fiscal 2007/08, slower than the previous year as higher interest rates dent consumer demand, and analysts expect growth to cruise at a similar speed next year.
While still strong, Asia's third-largest economy has lost altitude from the heady 9.6 percent expansion seen in 2006/07 and 8.7 percent would be the slowest growth in three years.
But the Reserve Bank of India (RBI) chief said Thursday's official estimate would not alter the central bank's wait-and-see approach as the figure was broadly in line with its forecast of 8.5 percent for the fiscal year that ends on March 31.
Analysts had been looking for gross domestic product to moderate this year from its fastest pace in 18 years in 2006/07, with a Reuters poll forecasting expansion of 8.7 percent.
"Clearly moderation has set in, essentially driven by industrial moderation," said Shubhada Rao, chief economist with Yes Bank. "Going forward in (fiscal year 2008/09) we expect growth to maintain 8.5 percent levels, led by infrastructure spending."
Financial markets were cool to the estimate, the first for this fiscal year, with the partially convertible rupee dipping to 39.5450/5600 per dollar from about 39.49/50. The benchmark 10-year federal bond yield was initially stable at 7.49 percent but later slipped to 7.47 percent after the central bank said inflation was contained.
Growth in manufacturing, which makes up nearly 15 percent of GDP, was expected to slow to an annual 9.4 percent from 12 percent the previous year, the central statistics office said.
HIGH RATES BITE
The central bank raised interest rates five times in 10 months from June 2006 and tightened banks' reserve requirements repeatedly last year to restrain inflation and credit growth. Annual inflation, as measured by wholesale prices, has subsided to just below 4 percent, below RBI's comfort ceiling of about 5 percent.
But the monetary authority kept rates steady last month, saying inflation risks persisted. Just over half the analysts polled by Reuters after that decision saw the central bank cutting rates by 25-50 basis points by June while the rest saw no change for the next five months at least.
Central bank officials told reporters on Thursday inflation had been contained but Governor Yaga Venugopal Reddy said the "inherent logic" of last week's rate decision had not changed. "There is no fresh information that requires any particular response," he told reporters. "We are watching the evolving uncertainties."
HEADWINDS
Harish Menon, an economist with ING Vysya Bank, expected growth to end the year close to the 8.7 percent estimate. "This will be in line with the central bank's calibrated moves to avoid overheating of the economy," Menon said. The government said services, which make up more than half of economic activity, were expected to grow 10.7 percent in 2007/08.
Farming, which generates a fifth of GDP but employs about 60 percent of the billion-plus population, was estimated to expand 2.6 percent, while electricity generation was seen growing 7.8 percent and mining output 3.4 percent.
Latest available data shows consumer goods production contracted in November compared to November 2006 and truck makers Ashok Leyland and Tata Motors have seen sales decline this fiscal year because of tight credit conditions.
Menon expected economic growth to pick up momentum in 2008/09 and top 9 percent once again, making it one of the world's fastest-growing major economies.
But others saw a possible U.S. recession and comparatively high Indian interest rates creating headwinds for the economy, particularly if the rupee, which gained more than 12 percent against the dollar in 2007, continued to rise.
"Going forward there are clearly downside risks to growth emerging from external factors," said Sonal Varma, an economist at Lehman Brothers.
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