Tougher times ahead, inflation could touch 13 %

.. India's annual inflation rate may rise to 13 per cent, warned outgoing chairman of the Prime Minister's Economic Advisory Council, C. Rangarajan as he spoke to the media. The country's economy is expected to grow 7.7 per cent in the year to March-end, cooling from the year before and below a recent forecast from the central bank, a government report said on Wednesday.

Tight monetary policy triggered by high oil and commodity prices, and global market turmoil would combine to moderate growth, Prime Minister Manmohan Singh's Economic Advisory Council said in its economic outlook for the financial year 2008-09.But it added that to trim inflation to 8-9 percent this fiscal year from the current 13-year highs, a tightening bias would have to be maintained.

"The downside risk to our growth expectations in 2008-09 is primarily from a further deterioration in global conditions with its attendant impact on India -- be it in the sphere of oil prices or capital markets," the panel said in its report.

The current account deficit was likely to widen and the pressure on the fiscal system would grow through rising subsidy bills. A majority of forecasts expect expansion in Asia's third-largest economy to slow as policymakers struggle to fight rising prices by raising interest rates, tightening liquidity and cutting import duties.

The central bank in its monetary policy review last month cut the growth forecast to 8.0 percent from 8.0-8.5 per cent previously, but its prediction is still above many private banks' outlook for the Indian economy.
In its last report under the leadership of outgoing chief C. Rangarajan, a former Reserve bank governor, the panel said coordinated policy action at home, cooling commodity prices and action by other central banks could help bring India's inflation rate down to 8.90 per cent this fiscal.

"Maintaining a tight monetary policy stance and active fiscal and other methods are necessary to bring down inflation rates," the panel. It said India had been slow to raise the retail price of petroleum products in the face of surging crude rates and there remained a "large backlog" of adjustment still to be made. The Reserve Bank of India (RBI) has raised its benchmark-lending rate by 50 basis points to 9.0 per cent; it’s highest in seven years and the third increase in two months, as it battles annual inflation close to 12 per cent.

It is also increasing the proportion of funds banks must keep on deposit to 9.0 per cent to absorb surplus cash in the banking system as it seeks to quell demand and quash knock-on price hikes from higher fuel prices. The panel said fiscal deficit targets for 2008-09 would ‘overreach’ while revenue deficits would persist. It added that serious fiscal risks were arising from growing off-budget liabilities estimated at 5 per cent of GDP.

Hefty fuel subsidies, loan waivers for millions of poor farmers and proposed salary increases for government employees are constraining the country's finances. International ratings agencies have expressed concerns over India's deteriorating public finances. "Despite appreciable fiscal consolidation, large and growing off-budget liabilities are however a matter of concern. With these included, the fiscal situation no longer looks stable and sustainable," the panel said.

India's economy has grown by an average of 8.8 per cent over the past four years, grabbing the attention of global investors and raising its profile on the world stage.