India Predicts Decade-Low Growth Amid Inflation Risks

India forecast the weakest economic growth in a decade as subdued investment and elevated inflation add pressure on Prime Minister Manmohan Singh to extend policy changes and revive his development agenda.

Gross domestic product will rise 5 percent in the 12 months through March 2013, below last year’s 6.2 percent and the least since 4 percent in 2002-2003, a Central Statistical Office statement showed in New Delhi today. The median of 34 estimates in a Bloomberg News survey was 5.5 percent.

India faces inflation of more than 7 percent, one of the fastest levels in major emerging nations, limiting the extent the central bank can cut interest rates to spur expansion. The government has vowed spending curbs to damp price gains as it prepares to unveil the annual budget, part of a wider policy overhaul since September to lure capital inflows and ease bottlenecks by speeding up infrastructure projects.

“Putting out a number like this says that we need to get our act together,” said Vishnu Varathan, an economist at Mizuho Corporate Bank Ltd. in Singapore. India faces a modest recovery and the government needs to maintain the push to spur the economy, he said.

The rupee is up about 4 percent against the dollar since the policy changes began Sept. 13, while the BSE India Sensitive Index has risen 9 percent. The currency weakened 0.1 percent to 53.24 per dollar as of 1:47 p.m. in Mumbai. The stock index fell 0.3 percent. The yield on the 10-year bond maturing June 2022 dropped to 7.86 percent from 7.91 percent yesterday.

Policy Changes

The government has opened industries including retail and aviation to more foreign participation, and aims to loosen limits on investment into the pensions and insurance industries.

It has also set up a panel to accelerate stalled road, port and power projects, eased caps on capital inflows and allowed higher diesel tariffs to curb fuel subsidies.

Finance Minister Palaniappan Chidambaram, who is due to present the budget on Feb. 28, has pledged to contain the fiscal deficit at 5.3 percent of GDP in 2012-2013 and pare it to 4.8 percent the following year.

The Reserve Bank of India lowered rates to 7.75 percent from 8 percent last month, the first reduction since April. At the same time, Governor Duvvuri Subbarao signaled there’s limited space for further easing because of lingering price pressures and risks such as a record current-account deficit.

Fiscal Consolidation

“We have taken note of the roadmap for fiscal consolidation put out by the finance minister,” Subbarao said today in Guwahati in eastern Assam state. “We are also looking forward to the budget to get a better understanding of how fiscal consolidation will be done.”

Inflation, based on wholesale prices, decelerated to a three-year low of 7.18 percent in December. Consumer prices rose 10.56 percent in December from a year earlier, the fastest in the BRIC group, which also includes Brazil, Russia and China.

Singh, facing a general election by May 2014, snapped two years of policy paralysis with the recent changes. Allegations of graft against officials contributed to the earlier logjam and deterred spending on infrastructure.

The government is trying to narrow budget and trade deficits to avert a credit-rating downgrade. The current-account gap was $22.31 billion in the quarter ended Sept. 30.

Companies such as motorcycle maker Hero MotoCorp Ltd. have reported declining profits, while higher costs led mobile-phone operator Bharti Airtel Ltd. to increase prices in January.

IMF Forecast

The International Monetary Fund predicted 6 percent Indian GDP growth in 2013-2014 in a statement released yesterday, after so-called Article IV talks with officials in the country.

It flagged declining corporate and infrastructure investment and said borrowing costs should be left unchanged until inflation is contained, adding the budget deficit will probably be above target at 5.6 percent of GDP this fiscal year.

The lender also said that while India’s expansion remains one of the highest in the world, risks are on the downside.

“The IMF is highlighting a similar stance as what the Reserve Bank of India governor has been saying, that room for easing is limited because of the twin deficits and high inflation,” said Rohit Arora, a fixed-income strategist at Barclays Plc in Singapore. “The possibility of easing in March is getting lower and may be delayed.”

Indian authorities, in discussions with IMF staff, said they plan to continue to focus on liberalizing capital inflows, according to a report released along with the statement.

Liquidity Ratio

The Indian officials also said the statutory liquidity ratio, or the proportion of deposits lenders must keep in government bonds, may be “further recalibrated in accordance with evolving monetary and fiscal conditions.”

The Reserve Bank cut the ratio to 23 percent from 24 percent, effective Aug. 11 last year, the first such reduction since 2010.

The IMF’s growth forecast compares with average expansion of about 8 percent in the past decade. More than two-thirds of India’s population live on less than $2 per day, according to World Bank data, adding pressure for faster development.

India will continue to take steps to revive economic expansion, the Finance Ministry said after the GDP release.

Elsewhere in Asia today, Taiwan said its exports rose 21.8 percent in January from a year earlier. Australian employers added part-time jobs in January and fewer people hunted for work, helping keep the unemployment rate unchanged, a report showed today, as interest rates at a half-century low support hiring.

The European Central Bank will probably keep its benchmark interest rate unchanged at a record low of 0.75 percent, according to a Bloomberg survey. The Bank of England will also hold its benchmark interest rate at 0.5 percent, a separate survey showed.

The U.K. and Germany will probably report declines in industrial production in December compared with a year earlier, according to the median estimates in Bloomberg surveys. Spain’s non-adjusted industrial output slid 8.5 percent.

Initial jobless claims in the U.S. probably fell to 360,000 in the week ended Feb. 2 from 368,000 the previous week, a separate survey showed before a report today.

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