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Tuesday, May 31, 2011

Price Hike Among Commodities Makes India's Growth Story Suffer

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The country's economy grew by 7.8% in the first quarter compared with the same period last year, the latest government figures showed. For the financial year to March, the economy grew by 8.5%, lower than the government's forecast of 8.6%.

India is one of the fastest-growing economies in the world, but has been hit hard by rising consumer prices. Analysts say a surge in prices of essential commodities, coupled with measures to cool the economy, has started to take a toll on growth. The central bank has increased interest rates nine times in 15 months. The last rise on 3 May boosted the benchmark interest rate by 50 basis points to 7.25%

Losing momentum

India's economy has posted robust growth since the global financial crisis. However, the Reserve Bank of India's monetary tightening policies have seen a loss of momentum. Analysts say that as the central bank continues its fight against rising prices, the pace of growth is likely to be slow for some time.

However, analysts warned that though a slowdown in growth had been broadly expected, continued loss of momentum would have an adverse effect on the economy. "It is significant because it is the first quarter of sub-8% growth since the crisis," said Sonal Verma of Nomura. "The last four quarters we have been growing above 8%, so this is really a slow starting point for the next financial year," she added.

The Indian government had set an economic growth target of 9% for this fiscal year. However, in May Finance Minister Pranab Mukherjee admitted that India could miss that goal because of high inflation and rising commodity prices. "When you look at India, it is perhaps going through a slight soft patch," said Mr Wood.

"Most countries would be delighted with the growth numbers India is recording, but it's lower than government growth targets." Mr Wood added that while India's had grown robustly compared to developed economies, compared with China, it was lagging behind. China's economy expanded 9.7% in the first three months of this year compared with the same period the year before. "They would love to emulate China's growth, but we don't think they are there yet," said Mr Wood.

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1 comment:

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