>India on track to grow 8.6 pct in this fiscal year – Reuters

Posted on February 7, 2011 by

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India’s economy, Asia’s third-largest and a driver of the world recovery, is expected to grow 8.6 percent in the year ending in March, but at the risk of high commodity prices widening the trade gap and exacerbating inflation.
The government estimate comes after a Reuters poll last month forecast the economy would grow 8.7 percent in the current fiscal year and 8.5 percent in the year that ends March 2012.

Prime Minister Manmohan Singh said last week rising prices were a serious threat to growth momentum, underscoring the worries of policymakers about headline inflation above 8.4 percent, driven by stubbornly high food prices. India is the second fastest-growing major economy in the world, after China, and both countries are battling inflation.

India’s trade gap and fiscal deficit also cloud the outlook for an economy that, along with China’s, has been a key driver of recovery from the global downturn. The trade gap hit a 23-month high of $13 billion in August as imports backed by rising domestic demand far outstripped exports, which were crimped by sluggish recovery in advanced markets, but it shrunk to $2.6 billion in December.

Trade Secretary Rahul Khullar has said that if global crude and commodity prices rise, the trade deficit in the January-March quarter could widen again. “I am happy with the 8.6 percent growth. But there are other concerns apart from GDP. My main concerns are inflation and the trade gap,” Finance Minister Pranab Mukherjee told reporters. In the fiscal year that ended last March, India’s GDP rose 8 percent, up from 6.7 percent in the fiscal year that ended in March 2009.

India’s chief statistician, T.C.A. Anant, said rising global crude oil prices had put pressure on India’s fiscal deficit, although he expects the government to meet its target of keeping the fiscal deficit to 5.5 percent of GDP this fiscal year. Rising crude prices threaten to add to the government’s fuel-subsidy burden.

India’s expected GDP growth this fiscal year will be helped by a rebound in agriculture, which is expected to grow 5.4 percent on good monsoon rains after expanding by just 0.2 percent a year earlier following a severe drought.
The full-year outlook implies a slowdown in fiscal fourth-quarter growth to about 8 percent year-on-year, a four-quarter low, according to Dariusz Kowalczyk, an analyst at Credit Agricole-CIB in Hong Kong. The expected January-March quarter moderation “would provide hope for slowdown in demand-pulled price pressures”, Kowalczyk said in a note.

Bond yields, swap rates and the rupee were little changed after the release of the data on Monday.
The strong growth in agriculture is expected despite recent shortages in vegetables, such as onions and potatoes, which have led to high food inflation spilling into the broader economy.

RATE RISES
The Reserve Bank of India, has raised interest rates seven times since March, although monetary policy is expected to have only a limited impact on reining in supply-side driven food inflation. Rising interest rates, meanwhile, have taken a toll on manufacturing, which is expected to grow by 8.8 percent this fiscal year, down from nearly 11 percent growth a year earlier. “You have to look at manufacturing, which at 8.8 percent is beginning to show capacity constraints and price pressures, which could be a drag on growth going forward,” said N. Bhanumurthy, senior economist with the National Institute of Public Finance and Policy. The manufacturing sector grew at 13 percent in the June quarter and nearly 10 percent in the September quarter, thanks to robust domestic demand, as India came out of the global financial crisis much faster than many other economies around the world. Core sectors in industry like mining and construction, which tend to reflect the health of the overall economy, are expected to grow at 6.2 percent in the current fiscal year. India’s industrial growth slumped to an 18-month low in November to 2.7 percent but PMI data showed manufacturing grew at a slightly faster pace in January.

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