India cuts growth forecast as rate hikes bite

NEW DELHI: India on Wednesday cut its growth forecast for this financial year to 8.6 percent from nine percent, its economy hit by a string of interest rate hikes to tame inflation which is nearing double-digits.

The finance ministry's forecast for Asia's third-largest economy is above last year's expansion of 8.5 percent and exceeds most private economists' expectations, which are as low as 7.5 percent.

There has been a "perceptible slowdown" in the past two financial quarters, the ministry noted, according to the Press Trust of India news agency.

The Congress-led government had projected nine percent growth for this financial year to March 2012 in its budget presented in February but 10 interest rate hikes since March 2010 have hit industrial output.

The ministry said that hiking rates can dampen growth in the short term but such steps are positive for sustained longer-term growth.

The government's decision to lower its growth projection came after data earlier in the month showed industrial output in May grew just 5.6 percent year-on-year -- its weakest pace in nine months.

India's economy grew by just 7.8 percent in the January-March quarter, the lowest in five quarters.

While growth of seven-to-eight percent would be envied by Western economies, experts say India needs at least 10 percent expansion to lift hundreds of millions of Indians out of crushing poverty.

Neighbouring China, which is also tightening monetary policy to fight inflation, reported this month that its economy expanded at a slower but still robust 9.5 percent year-on-year in the second quarter.

"Everybody has been accustomed to India growing at around eight percent for the last 10 years and I don’t think it will (in future)," analyst Mark Matthews of investment house Julius Baer told CNN-IBN network.

"Over the next year or so, I think that (growth) will come down to below seven percent," he said.

The finance ministry said the central bank was aiming "to moderate demand" to ensure that the economy does not overheat and fuel inflation.

The ministry also warned that high commodity prices and the eurozone sovereign debt crisis could hit India's strong export expansion, which has been bolstering growth, and forecast a slowdown in global trade volumes.

During the first quarter of the financial year, from April to June, India's exports surged 46 percent, buoyed by renewed demand in European and US markets.

Analysts expect the central bank to hike interest rates again at a scheduled meeting later this month as it struggles to subdue inflation running at 9.44 percent.

High prices have caused huge hardship for the country's poor, who are key supporters of the government, which is reeling from a string of corruption scandals.

Copyright AFP (Agence France-Presse), 2011