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Economic growth may cross 9%; inflation to fall to 6% by March

New Delhi: Overcoming the impact of global economic recession, the Indian economy is poised to achieve 9% growth in the current financial year itself driven by robust performance of agriculture and industry sectors, reports PTI.

In its mid-year analysis of Indian economy, the government said high inflation, which was a major concern, has started declining and hoped that it may fall to 6% by March, 2011 from over 8% now.

"The very rapid 8.9% growth in gross domestic product (GDP) recorded in the first half of 2010-11 raises the possibilities of a faster recovery to the pre-crisis level...It is estimated that growth in 2010-11 will be 8.75% with variation of 0.35% on either side," the analysis said.

The government has, however, made a case for deepening strengthening of economic reforms to sustain high growth rate and raising it further to double-digit level in the medium to long term.

Immediately after tabling the analysis in Parliament, finance minister Pranab Mukherjee told reporters, "I am hoping that inflation will come down to 6% by March 2011."

In the economic survey this year, Mr Mukherjee had projected a growth rate of 8.5% with variation of 0.25% on either side.

"Now why we have shifted the goal post from 0.25% to 0.35%, one of the reasons is there have been certain uncertainties, particularly recovery of Euro. And Euro has relevance both from viewpoint of foreign direct investment (FDI), investment and also from external trade, particularly export.

"A sizable percentage of Indian exports are destined towards Europe. Therefore, the recovery rather rapid and robust recovery of Euro is important from India's point of view," Mr Mukherjee said.

Contrary to estimates by various think-tanks, the economy during second quarter expanded by 8.9% taking the overall growth rate to the same level in the first-half and raised hopes of 9% growth in the current fiscal.

On deepening of reforms, the finance ministry has underlined the need for further fiscal consolidation and steps to deal with external capital flows "which are posing some adjustment challenges" in the economy.

The surge in capital flows, it said, has raised the question of domestic absorptive capacity which could lead to "over heating" of the economy.

However, with current account deficit of 2.9% in 2009-10, capital flows at 4.1% of the GDP have not been a "matter of concern", the analysis said.

The analysis called for improvement in infrastructure and core industries, universalisation of elementary education and issues concerning climate change as move to deepen and strengthen economic reforms to sustain high growth levels.


Citi expects EM Asia to outperform in 2011; says transformational boom in India to continue

In a 100-page global economic and strategy report, Citi Research says the multi-decade transformational boom in China and India will continue, not just in 2011, but for some years to come. It sees modest growth in industrial economies and expects the ECB and BoJ to hold rates in 2011, and the Fed too, well into 2012

Citi Research believes that the downside risks for housing in the US still linger. It expects the recovery to be moderate because of the lower contribution from the consumer. However, since inflation is low and the decline in unemployment has stemmed, monetary policy will be accommodating through 2011 and beyond. It thinks that the tax hikes being discussed would be deferred. Despite policymakers holding rates, "cyclical forces should gradually show through to modestly higher long-term interest rates," it says in a recent report.

In the Euro area, Germany will be an outperformer and there will be large divergence in its performance vis-a-vis fiscally-strained periphery countries. More importantly, Citi believes that "the sovereign debt crisis will continue in 2011 and beyond." Unless money supply, credit growth, and inflation become threatening, the European Central Bank (ECB) should keep interest rates at 1%.

For China, Citi expects inflation to be at the forefront. "We expect tighter monetary policy to control inflation, with higher interest rates and a stronger currency." Inflation will also be a major impediment to major reforms that will be initiated next year to raise household incomes, accelerate urbanisation, deregulate the service sector and correct input price distortions.

For India, Citi expects FY11 GDP at 8.4% and FY12 at 8.6%. The government will play a major role in this growth, with its employment programme and an emphasis on infrastructure. The good harvest and urban demand will support growth. Spend on infrastructure is expected to double to Rs40 trillion in the 12th Plan period (FY13-17) from Rs20 trillion in the current plan (FY08-12).

Citi argues that inflation in India should come off to about 6% in 2011 from 8.5% levels currently. It warns that there's a stickiness in prices of primary articles, possibly because of rising incomes, changing dietary patterns and stagnant yields; fuel prices could also rise, leading to higher inflation. It expects the "Reserve Bank of India (RBI) to hike rates by 25bps in Q1FY11 and by a further 50bps in the course of 2011, taking the repo/reverse repo rate to 7% and 6% respectively."

On the fiscal front, although things are better than in FY10 with the uptrend in tax collections and divestments (Citi expects the central government to surpass its budget estimate of 5.5% in FY11), the outperformance will be muted due to "the supplementary budget eroding almost all the surplus revenues from the telecom auctions and rising oil underrecoveries."

However, it is not so optimistic on the external account front. It points out that despite an uptrend in software exports and remittances, slower exports and higher imports will probably result in the current account deficit crossing 3% of GDP. It remains concerned about the composition of flows; recent trends indicate a deceleration in foreign direct investment (FDI). "Given the core forex theme of structural dollar weakness and India's strong domestic growth, we expect the Indian rupee will continue to strengthen to Rs43.5/$ by March 2011 and Rs42/$ by March 2012. Appreciation would have been stronger were it not for the rising current account deficit."

For Japan, Citi Research expects the economy to return to the growth path in 2011 with a sustained expansion of the global economy. However, policy-making remains a big overhang for Japan as "policymakers have yet to show a comprehensive plan to revive the economy."

The report says the United Kingdom is likely to show decent growth of about 2.5% YoY in 2011, aided by the low pound and improving business investment. The biggest problems will be inflation, loose monetary stance, cost pressures from a weak pound, another VAT hike and the destruction of excess capacity in the downturn. A rate hike could happen only late in 2011.

In Latin America, Citi expects rate hikes in most regions after a strong recovery and rising inflation in 2010. For CEEMEA (Central Eastern Europe, Middle East and Africa), Citi says "private consumption is likely to remain a drag on growth in the emerging European countries due to weak credit supply and the tight fiscal stance. The inflation outlook is conducive to slow and measured rate hikes."

(This article is based on secondary research. The report is for information only. None of the stock information, data and company information presented herein constitutes a recommendation or solicitation of any offer to buy or sell any securities. Investors must do their own research and due diligence before acting on any security. Some of the opinions expressed in this article are the author's own and may not necessarily represent those of Moneylife.) 


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