ADB projects 8% growth; inflationary pressures to persist

New Delhi, Apr 2 (UNI) The Asian Development Bank (ADB) today projected the growth of Indian economy by eight per cent in the fiscal 2008-09 and rebound to 8.5 per cent in 2009-10 even as it expected inflationary pressures to persist for the next few months.

Dr Narhari Rao, ADBs Chief Economist for India, told newspersons here that the recent import duty cuts on food items and export restrictions would have a salutory effect on prices after two to three weeks.

Mr Rao said India's economic expansion would moderate in 2008 due to the tight monetary policy being followed by the Reserve Bank of India adding he did not expect the Central Bank to ease policy before a drop in inflation took place.

Finance Minister P Chidambaram announced on Monday a slew of measures to bring down prices, including scrapping of import duties on crude edible oils and banned exports of non-basmati rice. He also announced several administrative and other fiscal measures to put water on inflationary fires.

''In two to three weeks, you can see some impact of duty cuts on inflation,'' Mr Rao said, while releasing the ADBs Annual publication-- 'Outlook 2008.' The measures would increase the local supplies, but it might require a higher subsidy to sell costly imported food items at government controlled prices, Mr Rao said.

The Wholesale Price Index rose to 6.68 per cent in the last one year ending March 15 from 5.92 per cent in the previous week.

The ADB said India's economy could moderate to 8 per cent in the 2008-09 fiscal year and then rebound to 8.5 per cent in 2009-10.

India's economic expansion would be constrained by the RBI's tight monetary policy and the Government attempts to curb inflation ahead of the elections to State Assemblies and General Elections later.

The report highlighted how growth outcomes in India over the next two years would partly hinge on the timing and scope for relaxing the current tight monetary policy. This in turn would be shaped by two key factors- the outturn in domestic food production and trajectory of global commodity prices.

Growth in private consumption would remain buoyant at just over six per cent in financial year 2008, underpinned by strong wage gains, income tax exemptions, debt waiver for farmers in the 2008 budget, high prices for cash crops, and pay hikes for civil servants.

However, despite strong investor enthusiasm, an anticipated slowdown in fixed investment would account for part of the deceleration in overall economic growth, the report said.

The postponement of some initial public offerings in early 2008 was one indicator of domestic companies scaling back expansion plans.

The report said domestic prices of food and fuel would be critical in determining Wholesale Price Index, which was projected at 4.5 per cent in the Financial Year 2008.

It warned that inflationary pressures would persist as the local supply of foodgrains and vegetables was expected to remain tight this financial year due to subdued sowing of the Rabi crop in 2007 and possibly the Kharif crop in 2008.

The report expected that inflation be held at five per cent in the next financial year. Easing of international prices of non-oil commodities, including foodgrains, would help offset price increases of domestic petroleum products ahead of elections which may ease inflation pressure in Financial year 2009.

While exports of low-profit margin sectors like textiles and handicrafts were hurt by an appreciation of the rupee in 2007, exports of higher value-added sectors like business services and capital-intensive manufacturing exports continued to grow.

The report expected the rupee-dollar exchange rate to be relatively stable in the Financial Year 2008 and 2009.

The ADB expected exports to grow strongly at 16 per cent this year as developed markets further opened up to India's high-tech service exports and market diversification deepened.

Import growth would also continue to be rapid as the country imported capital goods and intermediated to sustain high levels of investment. As a result, the Current Account Deficit (CAD) was expected to be 2.2 per cent in Financial Year 2008 and 2.6 per cent next year.

The report listed supply shocks beyond the 2007 and 2008 agricultural sowing seasons, rising food prices, tighter monetary policy and a global economic slowdown as major downside risks to the buoyant growth forecast.

India's strong dynamism helped it move to a higher sustainable growth path, it added.

Looking ahead, it notes key structural challenges include boosting domestic agriculture, improving labor productivity, establishing a new fiscal adjustment roadmap and continuing structural reforms.

UNI GS SYU HT1852