India’s growth outlook clouded by oil prices and inflation

Mar 19, 2011 12:00 AM

Domestic and global factors are conspiring to darken India's once-shining growth outlook, with inflation and sluggish investment likely to keep economic expansion well below the government's target of 9 % in the coming year.
Eight rate increases since last March, with more on the way, have failed to kill off inflation that topped expectations at 8.3 % in February. They have, however, begun to crimp demand. That threatens to worsen an investment climate already soured by bureaucratic delays and a government that has been crippled by a string of corruption scandals.

Sluggish investment, in turn, is slowing the addition of much-needed infrastructure and industrial capacity in an economy plagued by supply-side bottlenecks. Industrial output rose just 3.7 % in January, the strongest in three months.
“We really need infrastructure growth but you cannot create infrastructure at such high rates, so it's a double whammy situation," said K.G. Mantri, senior vice president at Mumbai-based Man Industries, which makes steel pipes.

Investment in India grew just 6 % in the December quarter, far behind the 18 % growth in the six months through September, according to Citigroup. The Reserve Bank of India warned of fragile investment conditions.
"Continuing uncertainty about energy and commodity prices may vitiate the investment climate, posing a threat to the current growth trajectory," the RBI said.

Global portfolio investors, meanwhile, have fled India this year. The benchmark Bombay share index has tumbled 12 %, making it the worst performing major stock market in Asia along with Japan, where the unfolding nuclear crisis threatens to add to a broader global environment of risk aversion.
With global oil prices above $ 100 and threatening to remain elevated, fuel has replaced food as India's key inflation worry. New Delhi faces the dilemma of maintaining diesel and cooking fuel subsidies and taking the hit to government finances, or making the politically unpopular and inflationary choice to pass along price rises to end-users.

Neither option is attractive for a country that imports two-thirds of its energy.
"The combined impact of the oil price rising and, much more importantly, the lagged effects of the interest rate increases so far are already actually leading to slowdown in activity," said Credit Suisse economist Robert Prior-Wandesforde, who forecasts 7.7 % growth in the upcoming fiscal year.

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