Economists see GDP growth tapering towards 7.8-8.3 per cent

MUMBAI: Even as government estimates suggest that the Indian economy may have grown 9.2% in 2006-07, economists are pointing to a slowdown this year.

The consensus figure for fiscal year 2007-08 among economists polled by DNA Money is that the economy will grow at around 8.3%. However, a Bloomberg report quoting economists from Goldman Sachs, HSBC and the Asian Development Bank (ADB) suggests a lower figure of 7.8-8% GDP growth this year, thanks to the new round of interest rate hikes by the Reserve Bank of India (RBI) and the liquidity squeeze imposed through a hike in banks’ cash reserve ratio (CRR) last week.

While ADB’s chief economist Ifzal Ali and Goldman economists Tushar Poddar and Mark Tan are projecting 8%, HSBC economist Robert Prior-Wandesforde expects 7.8%.
``The risks to our projections are now skewed to the downside due to the aggressive tightening,’’ Goldman’s Poddar and Tan said in a note to clients. ``Given the political pressures on the central bank and the long lags associated with policy, we see another 25 to 50 basis point increase in rates before they stabilise.’’

The economists polled by DNA Money stuck to their 8.3% consensus estimate, as long as the tightening does not continue beyond the April credit policy. Some of them also would not like to paint the reduced GDP projection for 2007-08 as a slowdown. Says Ajit Ranade, group chief economist, Aditya Birla Group: “The growth rate will still be above 8%. Slowdown is a misnomer. This does not mark the beginning of a declining trend.”

Other economists called the “slowdown” as being more the result of the base effect, with the previous year reporting 9.2%. It is not possible for the economy to maintain such a high pace year after year without a breather.

The services sector continues to be strong, contributing more than 60% to the GDP. Says Indranil Pan, chief economist of Kotak Mahindra Bank: “If at all there is a slight tapering off, that will be in the manufacturing sector, which is because of rising interest rates.” Pan adds: “There might be a slight slowdown in exports, too. But there will not be a huge slowdown like what we had seen during 1993, when interest rates went up sharply.”

Even macro factors support this optimism. Savings rates continue to be higher and the  employment rate, too, is not showing a decline.

The bottomline is that there has been no significant change in the structural factors that drive the economy and a year-to-year decline is only guided by cyclical factors and interest rate movements.

The benchmark wholesale inflation rate stood at 6.47 % in the week ended March 17, and may exceed the RBI’s inflation forecast of between 5-5.5% by March 31. This is what prompted the RBI to unexpectedly raise the cash reserve ratio  apart from an increase in a key overnight lending rate.

In response, most banks increased their lending rates by between 200 basis points and 250 basis points in the past four months. ICICI Bank on March 31 increased its prime lending rate for the fourth time since December.

"`We expect Indian growth to cool down significantly in the coming two years,'' ADB's Ali said in an interview in Washington on Tuesday. ``In the process, I think inflation will be ironed  out.''

Ali, however, had a cautionary note. "I'd be very cautious about the hype coming out of India. With increasing incomes, the demand for food items is going up. The country cannot respond," which suggests it is "reaching capacity constraints."

"The biggest risk is that inflation does not respond to monetary tightening due to supply-side constraints while growth  slows due to continued rate hikes, raising the spectre of stagflation,'' the Goldman economists said.

(With Bloomberg reports)