India Predicts Fastest Economic Growth Since 2008
India Predicts 8.6% Growth This Year
Adeel Halim/Bloomberg
Subbarao, who has raised rates the most among Asian central banks in the past year, last month urged the government to cut subsidies including that on oil, saying “monetary policy works most efficiently while dealing with an inflationary situation when the fiscal situation is under control.”
Subbarao, who has raised rates the most among Asian central banks in the past year, last month urged the government to cut subsidies including that on oil, saying “monetary policy works most efficiently while dealing with an inflationary situation when the fiscal situation is under control.” Photographer: Adeel Halim/Bloomberg
India’s government predicted the economy will expand the most in three years, supporting the central bank’s case for raising interest rates further after the steepest increases in Asia.
The $1.3 trillion economy will probably expand 8.6 percent in the year ending March 31 from a year earlier, the Central Statistical Organisation said in a statement in New Delhi today. The projection was in line with the median of 16 estimates in a Bloomberg News survey.
India, battling inflation stoked by rising consumer demand and food costs, is bracing for the impact of a possible spurt in oil prices following political unrest in Egypt, central bank Deputy Governor Subir Gokarn signaled yesterday. Prime Minister Manmohan Singh on Feb. 4 said India needs to tackle inflation with “great urgency” to sustain the economy’s momentum.
“Inflation risks are growing rapidly,” Shubhada Rao, chief economist in Mumbai at Yes Bank Ltd., said before the report. “Another rate increase next month is a huge possibility.”
The yield on the benchmark nine-year government bond rose one basis point in Mumbai today to 8.21 percent, a three-week high. The Bombay Stock Exchange’s Sensitive Index gained 0.2 percent while the rupee advanced 0.2 percent to 45.48 against the dollar.
Anti-Inflation Stance
Reserve Bank of India Governor Duvvuri Subbarao on Jan. 25 raised the key repurchase rate by a quarter-point to a two-year high of 6.5 percent and pledged “persistence with the anti- inflationary monetary stance” as he boosted the nation’s inflation forecast.
Subbarao said India’s benchmark wholesale-price inflation rate may be at 7 percent by March 31, more than the earlier estimate of 5.5 percent. The gauge stood at 8.43 percent in December. He maintained the RBI’s growth projection for the current financial year at 8.5 percent with an “upward bias.”
“A whole set of events unfolded in the Middle East which are starting to have an impact on oil prices and that is something which we didn’t anticipate at the time of making the policy announcement on Jan. 25,” Gokarn said yesterday in Dabolim, in the western Indian state of Goa. “It is going to have an impact on our thinking, on our actions going forward.”
India meets about three-quarters of its annual energy needs from imports. Oil prices could more than double if the unrest in Egypt forces the closure of the Suez Canal, Venezuelan Oil Minister Rafael Ramirez said Feb. 4.
Egypt’s Crisis
Protesters demanding an end to President Hosni Mubarak’s 30-year rule erupted Jan. 25 in Cairo and have left as many as 300 people dead, according to the United Nations. Concern that turmoil in Egypt could force the closure of the Suez Canal, halting crude shipments through the crucial waterway, sent North Sea Brent crude oil prices above $100 a barrel for the first time since October 2008 last week.
“There’s obviously a risk that the situation will transmit into higher commodity prices,” Gokarn told reporters in New Delhi today. “So, that intensifies the risk.”
Brent crude for March settlement climbed as much as $1.07, or 1.1 percent, to $100.90 a barrel on the London-based ICE Futures Europe exchange. Prices have climbed 44 percent in the past 12 months.
About 2.5 percent of world oil output moves through Egypt via the waterway and the Suez-Mediterranean Pipeline, according to Goldman Sachs Group Inc.
Opposition Talks
Egyptian Vice President Omar Suleiman and some members of the opposition yesterday agreed on limited steps to resolve the crisis, even as the government stood firm against the demand from protesters that Mubarak resign.
Subbarao, who has raised rates the most among Asian central banks in the past year, last month urged the government to cut subsidies including that on oil, saying “monetary policy works most efficiently while dealing with an inflationary situation when the fiscal situation is under control.”
While subsidies may contribute in the short term to keep supply-side inflationary pressures in check, they may “more than offset” this benefit by adding to aggregate demand, Subbarao said.
The comments build pressure on Finance Minister Pranab Mukherjee to cut the budget deficit, which has almost doubled in three years. Mukherjee, who is scheduled to announce this month the budget for the fiscal year starting April 1, is aiming to narrow the budget gap to 5.5 percent of gross domestic product in the year ending March 31. That compares with a shortfall of 2.7 percent of GDP in the year ended March 2008.
Excise Tax
In the last budget, Mukherjee increased the excise tax rate on manufacturers to 10 percent from 8 percent. It stood at 12 percent before the global financial crisis.
Yes Bank’s Rao said Mukherjee may boost the excise tax rate to 12 percent in next year’s budget.
Companies including Godrej Consumer Products Ltd., India’s second-largest maker of bath soap, say higher taxes will hurt profit, already squeezed by rising input costs. Godrej, which raised prices last month, may follow with more increases as “raw material costs are going up,” Chairman Adi Godrej said in a Feb. 4 interview with Bloomberg News.
“Raising taxes would be disastrous for the industry because we need stimulus very much as inflation is very high, interest rates have gone up again,” Godrej said. “Raising taxes would be a quite poor policy to my mind as it will hurt businesses.”
To contact the reporter on this story: Kartik Goyal in New Delhi at kgoyal@bloomberg.net.
To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net
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