2009 elections may hit India's growth rate

India's high growth level may not sustain and government's reforms may run out of steam as the main parties concentrate on winning support ahead of elections due in 2009, a consulting firm reported on Tuesday.

Noting that forecasts of gross domestic product growth for fiscal 2007-08 (ending March) are being revised down wards to 8.4-8.6 per cent (growth in 2006-07 reached 9.4 per cent), Oxford Analytica says this reflects the impact of a credit squeeze initiated by the Reserve Bank of India to combat inflation, which reached 6 per cent earlier this year.

A summary of analysis by Oxford Analytica, which claims to have 1,000 scholars, was posted on the Web site of Forbes magazine.

On the positive side, it says, growth in agriculture, a perennial under-achiever, may accelerate following a favourable monsoon and there are also indications that a period of 'jobless growth' is over, with rapid expansion in employment opportunities catching up with the rising rate of participation in the labour force.

A major positive sign is fast growth of capital goods industries and an expansion of infrastructure, which would support the economy in the long run. Besides, foreign portfolio flows are strong which are adding to local resources.

A recession in developed economies might increase outsourcing work to India, it says, noting that services, which account for over half of economy, continue to grow around 8 to 10 per cent.

Added to these are remittance flow of between $25 billion and $28 billion which help the current account deficit to close to 1-2 per cent of gross domestic product.

Discussing concerns, the report says while the RI has now brought inflation down to 3-4 per cent, it is unlikely to loosen monetary policy in the short term. Its strategy of sterilizing very large inflows of foreign currency also has the consequence of holding up interest rates.

The credit squeeze, it says, has been felt particularly severely in manufacturing, where growth fell to 8.6 per cent year-on-year in the second fiscal quarter from 12.7 per cent in the same period last year. It is expected to expand by 6 per cent over the year (against 12 per cent in 2006 -07).

Manufacturing has also been hit by currency appreciation. Growth in visible exports, which has run at 20 per cent for the last five years, may be negligible in 2007-08, it said. Together with the impact of high international oil prices (India imports 70 per cent), this could widen the trade deficit to the equivalent of 6-7 per cent of GDP.

If India is to maintain its transition towards economic modernity, the analysis says, the manufacturing industry -- which has the greatest potential to absorb labour -- must be its key strategic sector. In this context, the strong rupee and high interest rates are particularly problematic, it points out.