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India's growth to slow this year due to high inflation

The Organisation for Economic Cooperation and Development (OECD) on Tuesday projected India’s economic growth rate to slow down to 7.1 per cent in 2012 against 7.3 per cent in 2011 due to high inflation that leaves limited space for the Reserve Bank of India (RBI) to manoeuvre. Economic growth would, however, expand by 7.7 per cent in 2013, OECD said.

It should be noted that these growth figures are not exactly comparable with India’s official figures, as the country takes GDP at factor cost (exclusive of indirect taxes), while OECD calculates GDP at market prices (inclusive of indirect taxes).

In its latest economic outlook, OECD said further action on the monetary policy front would be constrained by inflationary pressures. India’s wholesale price inflation rose to 7.23 per cent in April from 6.89 per cent in the previous month.

However, food inflation entered double digits, even as the overall inflation, based on consumer prices, has already risen to double digits at 10.36 per cent in April from 9.47 per cent in March.

Inflation remains relatively high, OECD said, adding expected increase in regulated prices of some oil-related products will add to price pressures which will continue to weigh on household consumption. “This in turn will make the climate for investment less favourable. As a result, growth is expected to remain subdued through much of the year,” the report said.

According to Reuters, the report also said continued government policy uncertainty could erode the country’s long-term growth prospects. In the medium term, India plans to target nine per cent growth rate a year on an average for a five-year period starting this financial year.

The report also said the government’s fiscal consolidation plans this year would help reduce inflation and narrow the current account deficit. It, however, said there would be spending pressures on subsidies. The government has targeted to bring down subsidies to 1.9 per cent of GDP this financial year.

It was the fiscal story which, among other things, led to Standard & Poor’s lower outlook on India’s sovereign ratings.

Overall fiscal deficit is targeted to reduce to 5.1 per cent of GDP in the current financial year against 5.9 per cent in 2011-12. The current account deficit stood at a record four per cent of GDP in the first nine months of 2011-12.

The global financial crisis of 2008 pulled down India’s growth rate to 6.7 per cent in 2008-09. India has projected a growth rate of 7.6 per cent in 2012-13, up from 6.9 per cent recorded in 2011-12.

Economic growth in India has slowed due to a slump in manufacturing and investment spending. Meanwhile, the softening of external demand and rising imports have widened the current account deficit (CAD). OECD said the global economy was also gaining momentum, but the recovery is fragile.

GDP growth across OECD is projected to get slower from 1.8 per cent in 2011 to 1.6 per cent in 2012, before recovering to 2.2 per cent in 2013.

“With slow growth, high unemployment and limited room for manoeuvre regarding macroeconomic policy space, structural reforms are the short-run remedy to spur growth and boost confidence,” OECD Secretary-General Angel Gurria said.