Indias growth may dip to 7.5%: Dresdner

Written by Agencies | New delhi, June 30: | Updated: Jun 30 2008, 21:25pm hrs
Soaring inflation and high interest rates are expected to take a toll on the Indian economy, which is expected to witness a growth rate of 7.5 per cent this financial year against 9 per cent in 2007-08, according to Germany based Dresdner Bank.

For this fiscal year, we now expect GDP growth of only 7.5 per cent, Dresdner Bank, the banking arm of global insurance major Allianz group said, pointing out that Indian economy has lost further momentum this year with production growth slowing substantially in the first four months of 2008.

Dresdners projections are much lower than the Finance Ministrys expectations of 8-8.5 per cent GDP growth.

The UPA government has recorded an average 8.9 per cent growth during the first four years of its rule. Last fiscal, the countrys GDP growth stood at 9 per cent, compared to 9.6 per cent in the previous fiscal.

For five years starting from 2007, Planning Commission has targeted Indian economy to grow at nine per cent with the terminal year delivering a growth of 10 per cent.

The current rise in inflation and high interest rates have already left a dent on the industry and the production growth rate of the country has substantially slowed down in the past four months.

In fact, industrial growth had slipped to 3 per cent in March, but recovered to 7 per cent in April.

The only segment that is showing some resilience is the services sector, which is still recording double-digit growth rates, Allianz-Dresdner Economic Research said in its latest report on economy and markets.

Inflation was at a modest 3 per cent at the end of the year 2007, and is at present hovering over 11 per cent mark, the highest level in 13 years.

Rising Inflation is a matter of concern for India, particularly because the country is affected by rising food prices and as a considerable part of the countrys population has to spend its entire income on food, the report added.

Inflationary pressures were intensified due to rise in energy prices and wages.

After the surge in recent months, Rupee depreciated as much as 8 per cent against the US dollar and by 13 per cent against the Euro, the report added.

The pressure on the Rupee can be primarily attributable to the rise in inflation. Besides, there were other factors such as deterioration in the current account in the first quarter and the low influx of capital due to the restraint on the part of foreign investors at the Indian stock exchange.

Though the Reserve Bank of India has not yet taken any major decision in the currency market segment, however, Dresdner Bank said: It (the RBI) will be keen to avoid a more radical depreciation in order to keep inflation in check. Meanwhile, under relentless pressure to control inflation which has touched 11.42 per cent, RBI had announced a hike in both short-term lending rate (repo) and mandatory cash reserve (CRR) for banks by 50 basis points each.

Consequently, countrys largest lender, State Bank of India has also announced 0.5 per cent hike in their benchmark prime lending rate to protect margins, a move that would make home, auto and other retail loans costly.

Banks like PNB, Canara Bank, HDFC Bank among others also hiked their lending rates.