CII says it expects growth at
8% down from 8.4%
Inflation, rising fuel process
seen as main culprits
Inflation caused by many
factors including supply shortage
The Confederation of Indian Industry (CII) predicted slower Gross Domestic
Product (GDP) growth in the current year bucking last year’s 8.4% growth
propped up by 3.9% growth in Agriculture but insisted that growth will remain
impressive at the 8% level.
In its State of Indian Economy (SOE), CII cited hardening of interest rates,
rising fuel prices, and inflation to lower its expectation of GDP growth.
However, the 8% prediction assumes normal monsoon and a replay of Agricultural
performance combined with global growth.
CII said that while it is satisfied with the improving manufacturing and
electricity sector growth at 8.9% and 6.1% respectively in the 4th quarter (Q4)
of 2005-2006, it voiced concern over Industrials and Service sectors clocking a
year-on-year decline in the growth to 8.2% and 10.9% and the general slowdown
of mining to 3%. The Index of Industrial Production (IIP) growth also fell
marginally from 8.4% to 8.2%.
Inflation is a major problem in India now. As seen from accompanying table,
cost of food grain has grown up by as much as fuel. However, some specific
items such as Urad Dal went up by 65.9%, Moong Dal by 47.7%, and spices and
condiments by 22%. With Consumer Price Index (CPI) growing at 6.41%, the
Government has allowed the import of wheat and sugar at 0% duty thinking
that increased supply will lower the prices.
However, the Government is also expecting the inflation numbers to fall
primarily because last inflation figure which caused a jump in numbers to the
WPI happened June/mid-July last year. So, while inflation numbers may be
reported lower in summer, the real test will be the CPI.
Real fears of inflation is also raising fears of a rate increase by the
Reserve Bank of
India (RBI) leading to speculatively high yield curves where the 10-year
treasury is above 8%. Economists feel that the inflation is more supply side
issues than real inflation caused by fuel prices increases. There is very
little that the RBI can do to arrest such inflation and the more rates it hikes
the worse off the economy will get. The RBI has already employed tools it has
within its control such as controlling money supply (M3) to be lower than the
previous year, buying dollars, etc. However, latest data show that credit
growth is picking up which means that the RBI will need to tighten money supply
again. Most importantly, in a global economy, the RBI has to respond to what
other Central Banks do. Since most of them are increasing interest rates,
economists expect the RBI to follow suit.