Slowdown looms for Indian economy

A slowdown looms for India's economy amid global financial turmoil even though it may post better-than-expected growth for last year in official data due on Friday, economists say.

Just as positive global factors supported India's expansion earlier, "negative global factors," such as surging commodity prices and growing investor risk aversion, were "now threatening to pull its growth below potential," said Morgan Stanley economist Chetan Ahya.

India's trillion-dollar economy is estimated to have grown by 8.7 percent for the fiscal year to March 31, 2007, according to the government. But the figure to be released Friday could be higher since the farm sector may turn in an healthier-than-expected performance, economists say.

"There is a good chance this figure will be revised up," said Rajeev Malik, an economist at JP Morgan.

That expansion, however, is down from 9.6 per cent growth the previous year.

Meanwhile, growth this financial year is showing signs of sputtering still further with most private analysts forecasting the economy will expand by between seven and eight percent.

That's still turbo-charged by anaemic Western standards, but the figure is well shy of the double-digit levels economists say is needed to rescue hundreds of millions of Indians from crushing poverty.

Pessimism has been fed by data showing annual industrial output in March grew by three percent - its smallest rise in six years - and aggressive monetary tightening, which has pushed interest rates to six-year highs.

First-quarter year-on-year growth will probably be 8.2 per cent, but this would be the slowest pace in three years, Malik said.

Morgan Stanley saw "the lagged impact" of the central bank's monetary tightening pulling growth down to about 7.5 per cent in the first quarter.

The inflation increase, fuelled by fast-rising food prices, means no easing of interest rates to spur the economy.

India's government now is worried more about "the social tensions being caused by higher food and energy prices" than spurring growth, said Deepak Lalwani, director of Astaire Securities investment house in London.

"High inflation is historically a vote-loser in India as it hits the poor very quickly while high economic growth is not necessarily a vote catcher."

Inflation has been marching to three-and-a-half year highs of eight percent, raising fears in the ruling Congress party of a voter backlash in general elections due within a year.

The party suffered a big setback in elections last weekend in the southern state of Karnataka - a poll that was partially seen as a referendum on high prices.

India's central bank is more upbeat, forecasting 8.0 to 8.5 per cent growth in 2008/09 with the economy buttressed by an expected good monsoon, vital for the farm economy and fiscal policy stimulus.

But many private economists view the forecast as too bullish.

"The cumulative impact of monetary policy tightening and softer external demand will likely slow growth" to a level below official forecasts, said Malik, who added that he expects this year's figure will be close to seven per cent.