S&P Lowers India's Growth Rate To 8.6%

Global ratings agency Standard & Poor’s (S&P) expects India’s growth to slow to 8.6 per cent in 2007-08 on the back of higher interest rates and the strengthening rupee.

“The moderation from last year reflects a soft landing. The strength of the domestic demand is expected to keep the economy on a relatively higher trajectory, while the global developments have made the environment more risky,’’ said Subir Gokarn, the chief economist at S&P for Asia-Pacific.

The local currency might weaken to Rs 40.5 against the dollar by March 31, 2008, Crisil predicted, after climbing more than 12 per cent this year to a 9 1/2-year high of 39.3675 on October 4. It is the second-best performer in the Asia-Pacific region this year, according to the data compiled by Bloomberg.

In a mid-year review of the global economy, S&P said the Reserve Bank of India (RBI) would resist appreciation of the rupee beyond current levels and the Indian currency would depreciate to Rs 40.5 a dollar by the end of March 2008.

David Wyss, chief economist, S&P, said, “We are going to see more flow of funds in emerging markets. The liquidity (which is huge in the system) is scared of securistised paper. So funds have to move somewhere. The oil exporting countries, including Russia, have a surplus of $600 billion and a part of funds will flow to emerging markets such as India.”

“The pressure on the rupee to appreciate remains. Notwithstanding the widening trade deficit, the current account remains well within the boundaries of expected capital inflows. Recent measures to curb external commercial borrowings and expand outward investment limits by Indian companies and individuals will not change the balance in the short term.

“However, we expect that the Reserve Bank of India will resist the appreciation beyond current levels and the rupee will end the year around Rs 40.5 to the dollar,” Gokarn added.

Speaking about the 8.6 per cent GDP growth for India, Gokarn said, “A key contributor to this performance is the agricultural sector, which, on the basis of a good south-west monsoon, is expected to grow by 3.4 per cent.

The industrial sector, reflecting the cumulative impact of rising interest rates and the rupee appreciation, will expand by 9.2 per cent, somewhat slower than last year’s, but a still healthy rate reflecting continuing buoyancy in investment spending. Services are expected to grow by 10 per cent, based on strong domestic demand.”

India’s interest rates are clearly peaking, with the yields on government securities moving within a narrow range and banks beginning to soften lending rates in many segments. It is expected that the benchmark yield on 10-year government securities will remain in the range of 7.8-8 per cent until the end of the year (March 2008).

The RBI is not expected to change the repo and reverse repo rates and the cash reserve ratio (CRR) in its next quarterly announcement scheduled for October 30 said the rating agency.

S&P favoured a managed pace of appreciation of the Indian rupee to provide enough space (time) for economy and exporters to adjust with the evolving environment. “There was a sharp appreciation (about 10 per cent) in the Indian rupee against the dollar in three months and there was very little opportunity (time) for adjustments. China has used a route of managed pace in the appreciation of the yuan. India could consider the strategy on these lines to deal with the rupee appreciation,” Gokarn said.

S&P said that it foresaw inflation in India (measured by the Wholesale Price Index) to end the year with an average of 5 per cent. Overall, the prices of primary articles continue to exert inflationary pressure. The fiscal situation remains very much under control in India, with very high growth in direct tax collections. The budget target of 3.3 per cent for the fiscal deficit is expected to be easily met.

Emerging markets have largely ignored the economic slowdown and financial turmoil in the US. Although economies are even more tightly linked by trade and financial flows than in the past, the US is no longer the only driver for growth in these economies.

Wyss said, “Emerging markets are now driving world growth, a turnaround from recent decades. Last year, China accounted for 30 per cent of the increase in the world GDP on a purchasing power parity (PPP) basis compared with only 12 per cent for the US. This year, the slower US growth will reduce its share to only 9 per cent, while China’s share will rise to 33 per cent and India’s to 12 per cent.”