Possible overheating reins in growth soothsayers

New Delhi, Mar 29 | Updated: Mar 30 2007, 05:30am hrs
The cautious growth projections for India by multilateral institutions and rating agencies seem to have factored in the impact of a possible overheating of the economy and the subsequent tightening of the monetary policy, say economists.

The soft projections may force companies to rework their profit forecast for the next fiscal because the initial clutch of GDP growth estimates for 2007-08 put it at 8%, lower than the 9.2% expected in 2006-07.

Amitendu Palit, senior fellow, Icrier, says these projections are taking into account the base effect given the high growth expected in the current fiscal and the fall in real GDP growth due to higher inflation. He says 7.5-8.5% is a safe range for growth estimates. According to him, a lot of credit was seeing its way into the construction segment, leading to overheating. With the Reserve Bank of India taking monetary measures, including rate hikes, lending to overheated sectors may reduce. This will have a sobering effect on inflation. Companies should consider diversifying their portfolios to steer clear of trouble, he said.

Leading credit rating agency Crisil has projected India to grow 7.9-8.4% next fiscal, while rival Icra has estimated 8.5-8.75% .

Subir Gokarn, chief economist, Crisil, says the slower growth rate will result from the cumulative effect of the hike in interest rates and the tightening of the monetary policy by the RBI for controlling inflation. He says the projections by Crisil are based on assumptions that the country will have a normal monsoon and low variability in the industrial sector along with the hardening of interest rates.

Meanwhile, the usually conservative International Monetary Fund (IMF) has estimated a growth rate of 8.5% for the year 2007-08, while it has projected 9% for the current year. The ADB Outlook Report 2007 released on Tuesday has put the growth rate in 2007-08 at 8%. But on Wednesday, finance minister P Chidambaram was optimistic and said he expected the economy to grow at 9% in 2007.