UBS cuts India’s 2009 GDP forecast to 7.1%

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Mumbai, July 25: : UBS on Friday cut its forecast for Indian economic growth in 2008/09 to 7.1 per cent from 7.7 per cent earlier, as high inflation and rising interest rates bite into consumer spending.

Light and heavy industry absorb around 47 per cent of commercial bank credit, and high interest rates coupled with soaring raw material costs have also hit the industrial side hard, according to Philip Wyatt, economist at UBS.

Industrial production, which accounts for 20 per cent of GDP, expanded by 5.8 per cent in the March quarter, slower than 8.6 per cent in the previous quarter.

"The average rate of inflation will remain higher," Wyatt said. "There is increasing risk that the government would have to deregulate prices which would hit discretionary spending and encourage policy interest rates to stay higher for longer."

The Reserve Bank of India raised its key lending rate by 75 basis points to 8.5 per cent in June and increased banks' reserve requirements by 50 basis points to rein in inflation.

Annual inflation was 11.9 per cent in mid-July and is holding at its highest levels since the current inflation series became available in 1995.

The RBI holds a review on July 29 and seven out of 11 economists in a Reuters poll expect it to raise the key lending rate by 25 to 50 basis points.

UBS expects the total fiscal deficit, including off-budget items, to account for 7.5 per cent of GDP in 2008/09 and estimates the average rate of inflation at 8.7 per cent this fiscal year.

The Swiss bank expects the current account deficit to widen to 3 per cent in the current year and in 2009/10, from 1.5 per cent last fiscal year as a global slowdown hurts exports, while imports continue robust due to high oil prices.