MUMBAI, Dec 23: India's economy will continue to boom in 2007 but analysts say demand will slow as its central bank hikes interest rates to curtail consumer spending and higher prices.
India's one-billion-plus population are buying more cars, phones, homes and goods than ever before and its companies have expanded quickly to meet demand domestically and to tap overseas business through acquisitions.
But the pace of domestic demand has surprised the government and the central bank, which have moved quickly to quell a rise in the general level of prices caused in part by higher food and raw material costs.
“We think that economic growth will slow next fiscal year to 7.8 per cent from an expected 8.2 per cent this year,” said economist Shuchita Mehta at JP Morgan in Mumbai.
“The economy will still show healthy growth, but the Reserve Bank and government cannot allow prices to rise too quickly and will act aggressively to halt inflation.” A recent forecast by brokerage Merrill Lynch in India said wholesale price inflation, the most widely watched measure, will cross six per cent in January from around 5.16pc currently, mainly as goods and food prices rise.
“This is due to inflationary pressures arising from higher prices of manufactured goods in a rapidly expanding economy as well as supply-side constraints on primary articles such as wheat,” Merrill Lynch said.
In November, the government cut gasoline and diesel prices and eased import rules for wheat to slow inflation.
But Finance Minister P. Chidambaram said this week that it was too soon to say whether inflationary expectations have come down and that more action may be needed.
As a result, Merrill Lynch and JP Morgan expect the Reserve Bank to hike its reverse repo rate by a quarter percentage point to 6.25 per cent in its next policy review in January.
In early December the central bank, in a surprise move, hiked the amount of cash banks must set aside as reserve by half a percentage point to 5.50 per cent to reduce the amount of money available for new loans.
Since the start of 2006, the central bank has raised its repo rate, the rate at which it lends to banks, by one percentage point to six percent. The reverse repo rate, or the rate at which it lends to commercial banks, has been raised by 75 basis points to 7.25 percent.
The Indian economy grew 9.1 percent in the first half of the current fiscal year ended September and the central bank warned in October that there were signs of overheating and that basic food prices were rising too quickly.
“India may also be impacted by a slowdown in US growth rates though some of this will be offset if the government follows through with plans to spend more on infrastructure, health and education,” said economist Bidasha Ganguly with BRICS Securities.
Merrill Lynch estimated that Indian companies and the government will spend 109 billion dollars on new infrastructure projects in the three years ending March 2009, which will offset any global economic slowdown or any shortfall in farm output.
“The emphasis on infrastructure is helping to reduce India's dependence on agriculture, which still accounts for a fifth of gross domestic product,”Merrill Lynch said.
But JP Morgan's Mehta said that the government may need to spend more than budgeted because social indicators in India -- health, education and employment -- remain a major concern with nearly 300 million people living on less than a dollar a day.
