ADB lowers India's growth rate to 8 p.c. next fiscal

ADB lowers India's growth rate to 8 p.c. next fiscal

Special Correspondent

NEW DELHI: The Asian Development Bank (ADB) has projected a slowdown in India's overall growth to eight per cent during 2007-08 as compared to the 9.2 per cent growth anticipated this fiscal, mainly in view of the country's inadequate infrastructure and the monetary credit tightening measures initiated to contain overheating in the economy.

In its `Asian Development Outlook' report released here, the multilateral institution, however, noted that a pick-up in economic growth to 8.3 per cent would again be witnessed in the following year. It pointed out that a higher economic growth rate of nine to ten per cent would require infrastructure development at a much faster pace. Briefing newspersons here on Tuesday, ADB's Chief Economist in India, Narhari Rao, pointed out that the overall economic situation would have been worse had the Government not taken any measures aimed at fiscal consolidation.

Forecasting that the various steps initiated by the Government to contain inflationary pressures would yield results, the ADB projected the rate of inflation to slide to a more "tolerant" level of five per cent in both 2007-08 and 2008-09 from over six per cent prevailing now. This, it said, would be as a result of tighter monetary policy, an increase in farm crop acreage, a good rabi harvest and import duty cuts on certain essential commodities.

Explaining how the decline in growth rate would come about during the new fiscal, the report said that while domestic overheating was raising demand, the Reserve Bank of India (RBI) was being forced to respond by hiking interest rates. The rising interest rates, in turn, would first lead to a dampening in demand for property, followed by "subtle and wide-ranging consequences" in other components, it said.

"These restraints on demand growth from home buyers, manufacturing investors and consumers will be accompanied by fiscal discipline...These forces are expected to moderate growth rates bringing it down to 8 per cent in 2007-08," the ADB report said.

As a consequence, the drop in construction momentum, the report said, was expected to persist through early 2007-08, with knock-on effects on those consumer durable products which benefited from the construction and sale of new homes so far. Coupled with the rise in interest rates, the slowdown trend would continue during the next fiscal year.

On the other hand, while the modest appreciation in rupee value would check export growth, the growth in imports would also moderate owing to easing of demand growth, it said.

While the Prime Minister's Economic Advisory Council Chairman, C. Rangarajan, had dubbed the overheating as "still a cyclical phenomenon", Mr. Narhari Rao said: "At the moment, overheating is structural due to infrastructure constraints."

As to whether the RBI would further tighten the monetary policy, Mr. Rao said much would depend on the inflationary track in the days to come. Holding out a warning against likely supply shocks in the kharif harvest during 2007 and beyond, the ADB suggested improved food supply management policies so as to reduce the volatility in commodity prices.

"Minimum support prices and buffer stock targets are not being filled, while measures to augment food stocks through imports have failed. A purely monetary solution to price increase will not work if food prices resume their acceleration," the report warned.