'India may escape world slowdown'

Written by Reuters | New Delhi, January 17: | Updated: Jan 17 2008, 20:17pm hrs
A slowdown among developed economies may not have a significant impact on India but pressures from high oil and food prices would make managing inflation a challenge in 2008/09, a top government panel said.

The report released by C. Rangarajan, Chairman of Prime Minister Manmohan Singh's Economic Advisory Council, said India was expected to grow at 8.5 per cent in fiscal 2008/09 but listed several downside risks.

"The Indian economy is much less dependent on the external markets than the Chinese economy," the panel's review of the economy said.

"While some export demand compression is likely to put an additional burden on our exports of goods and services, it is unlikely to be large enough to significantly depress growth. However, the flip side to this is that the pressure on prices of oil, food and other raw materials is likely to continue, making inflation management in 2008/09 quite challenging."

The report said the economy would grow 8.9 per cent in 2007/08, slightly lower than previously expected due to slowing manufacturing expansion and sluggish output growth in power and mining.

Asia's third-largest economy has expanded at an average of 8.6 per cent over the past four years and is poised for another year at a similar pace in 2007/08.

India grew 9.4 per cent in the 2006/07 fiscal year, its strongest in 18 years and second only to China among major economies.

But annual growth dipped to 8.9 per cent in the September quarter, falling below 9 per cent for the first time in three quarters, as industrial output slowed due to monetary tightening designed to trim inflation.

FUEL PRICES AND INFLATION

Policymakers are confident of maintaining growth momentum despite a surge in the value of the rupee against the dollar, higher interest rates and record global crude oil prices. The report said the headline wholesale price inflation rate should go to a little over 4.0 per cent if domestic fuel prices are revised and remain stable around that level until the end of the fiscal year in March.

Inflation hit a two-year high of 6.69 per cent in January last year but softened after the RBI tightened policy and the government cut duties on a range of items to calm prices.

A panel of top ministers is scheduled to meet later on Thursday to discuss revising fuel prices, a decision the government has been putting off for months, fearing it could lose public support ahead of elections.

The report said pressure on the rupee to appreciate was likely to continue in the immediate future and it urged the government to provide clear signals to enable industry to adjust to a higher exchange rate environment through productivity increases and by tapping the booming domestic market.

It said the approach to dealing with the exchange rate for the rest of 2007/08 would be continued intervention, accompanied by adequate sterilisation.

The RBI bought $7.83 billion in intervention in November, when the rupee tested a near-decade high of 39.16 versus the dollar, data showed on Wednesday.

The Reserve Bank of India has been buying dollars heavily to slow down the rupee, which climbed more than 12 per cent in 2007 to be one of Asia's best performing currencies.

Foreign portfolio flows of $17.4 billion into stocks and about $2.3 billion into debt in 2007 put upward pressure on the rupee.

Traders say the central bank's intervention has picked up since the start of 2008 on flows into new share offerings. A $3 billion initial public offer by Reliance Power was fully subscribed in a minute of its opening on Tuesday.