Global rating agency Standard & Poor's on Tuesday said tight monetary policy to tame rising inflation will slow down India's growth a bit to 7.5-8 per cent in 2008 and expressed concern about the worsening fiscal situation.
"Continuing inflationary pressures indicate persistence of the tight monetary stance. Growth is slowing slightly, but the main concern is the worsening fiscal situation as subsidies are used to suppress inflation," says S&P's Asia Gauge report.
As per S&P's growth and inflation outlook, India is expected to grow between 7.5-8 per cent in 2008, while in 2009, GDP growth is forecast to be in 7.3-7.5 per cent range. "With countries allowing domestic fuel prices to increase even partially, there is little question that, as long as oil prices remain at current levels, or even decline moderately, the price adjustments will keep up the pressure on inflation rates across the region. This puts the spotlight on monetary policy," Standard & Poor's Asia-Pacific chief economist Subir Gokarn said.
Gokarn further explained that the surge in oil and commodity prices has curtailed central banks' ability to begin easing up on liquidity in the Asia-Pacific region.
A stable first-quarter performance buoyed by robust domestic demand in countries such as China and India has shifted the region's monetary-policy priority toward curbing inflation, at the cost of growth. Despite growth slowing down in the second quarter, inflation-controlling measures continue, the S&P report stated.
"With the exception of New Zealand, every country we cover has begun raising policy rates and is expected to continue to do so for the rest of 2008," Gokarn said.
The report further stated that the Indian economy had expanded by a healthy 8.8 per cent in first quarter of 2008 attributed to a significant contribution from investments and government spending during the quarter. On a fiscal year basis (April 2007-March 2008) or FY 2007-08, witnessed nine per cent growth.
"However, high interest rates and rising inflation are expected to hinder consumer spending and corporate investment in 2008 and 2009," it added.
The report further stated that as monetary-tightening measures begin to take effect, inflation rates are expected to come down in 2009, with a hardening of interest rates.
As a result of higher prices throughout the Asia-Pacific region, oil consumption is expected to start declining, thus contributing to a moderation of global oil prices. While oil prices may not rise in 2009, they are expected to remain relatively high, putting pressure on the current accounts of most of the countries in the region, it added.
The growth expectations for the Asia-Pacific region have been revised down as its quarterly assessment indicates that the main threat to growth has shifted from the slowdown in the United States to inflationary pressures and the efforts by the region's governments and central banks to tackle them.