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WallStreet Journal: India’s 9% GDP Boast Draws Skepticism

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India’s 9% GDP Boast Draws Skepticism - India Real Time - WSJ

By Megha Bahree

Now that some of the dust around the budget has settled, economists are questioning the government of India’s estimate that the country can expect GDP growth of 9% in the year beginning April 1. Some economists already have cut back their expectations to as low as 7.7% growth. Key reasons are high inflation, the government’s budget deficit, the rise in commodity prices and the need to curb all of these.

Morgan Stanley earlier this week cut its growth estimates for the second time this year, first from 8.7% to 8.2% and now to 7.7%. In a research report, it says it expects the government to slow its expenditure growth to single digits and that rising inflation will dampen highly-touted private consumption growth.

“The two key factors that are making us nervous on the growth outlook are inflation persistently staying above policy-makers’ comfort zone and weak investment growth trend,” the report says. The recent spike in commodity prices ensures that inflation will continue to be a major issue.

As a result, “the cost of capital is likely to remain high for longer than we had expected, adversely affecting growth,” it said. Morgan Stanley is also predicting a reduction in government spending in an attempt to reduce deficits, further adding to the slowdown in the economy.

Leif Eskesen, chief economist for India and ASEAN at HSBC Global Research, pegs growth in the next financial year at 8.1%. He blames the slowdown on a “base effect”—having to rise again on the heels of the strong rebound in growth during the current financial year–and a tightening of monetary and fiscal policy intended to tame inflation. The impact of the latter is typically only felt with a lag, said Mr. Eskesen.

In addition, Mr. Eskesen said he expects a further tightening of interest rates to the tune of 1 percentage point in 2011.

Gunit Chadha, managing director and chief executive of Deutsche Bank in India, says he’s confident of the India growth story but with some qualifiers. Prime Minister Manmohan Singh has set 10% GDP growth as a target. But as it now stands, that’ll be tough to achieve.

“Double-digit growth is not consistent with what the structural capacity of the country is,” he said. Meaning that while demographics and consumption continue to be strong factors and underpin India’s growth, double-digit growth expansion is simply not because the supply side will not be able to keep up with demand.

“It’s fair to assume that the floor is 7.5-8%,” he says. “And 9% gets achieved really [only] if we see a sharp pull back in commodity prices.”
 
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