MUMBAI: From being one of the most preferred investment destinations, foreign funds are slowly moving out of India as growth has slowed in the government’s fight against double-digit inflation.
The US sub-prime crisis, followed by soaring in crude oil prices, has left the Indian stock markets bruised in the last six months.
The recent recovery, on cooling of oil and dollar’s newfound strength, has suffered with India's inflation peaking to 12.44 per cent and signs of a global slowdown rising.
ECONOMICTIMES.COM spoke to Mr. Kaushal Sampat, chief operating officer of Dun & Bradstreet India , on the factors that be and need of the hour.
Q. How far reaching has the impact of US sub-prime crisis been on India? How long do you see the impact continuing?
A. Since India has very little exposure to the US mortgage market, the direct impact of the sub-prime crises has been very limited. However, the credit crunch in the global economy and increased risk aversion of global investors has increased the volatility of financial flows to Indian economy. From a stock market perspective, FII investments into India have been impacted by conditions in overseas economies.
Given that the impact of US sub-prime on the global economy is still to completely unfold, it would be difficult to state the magnitude and duration of its impact on the Indian economy.
Q. PM's Economic Advisory Panel has projected GDP growth of 7.7% and inflation to touch 13%. Do you see it differently?
A. D&B expects inflation (as measured by the WPI) to touch 13% by Sep ‘08 and remain elevated and in double digits till December. However, on the GDP front, we are slightly more optimistic, and expect it to grow at 8% in FY09. This is because while industrial production is expected to slowdown significantly, the services sector is expected to do relatively better and experience only a slight moderation. The revival of monsoon may aid prospects for agricultural output as well.
Q. Where do you see inflation by March end?
A. The fiscal measures initiated by the government to augment supply and contain inflationary pressures are expected to yield results around December and inflation is likely to come down to 8-9% range by March ’09.
Q. Do you concur with the finance ministry and RBI’s decision to focus on containing inflation over economic growth? Do you expect further monetary tightening by RBI?
A. A tight monetary stance to curb money supply growth and hence contain demand side pressures so as to rein in inflation seems to be the only viable policy option in the short run, as supply cannot be increased in such a short span of time. Given the deeper socio-economic implications of rising prices, settling for slightly lower levels of growth in order to curb inflation in the short run seems to be the preferred maxim as of now.
With inflation hovering above 12% and money supply growing above RBI's target levels, we expect RBI to further tighten its monetary stance. We therefore expect further policy rate hikes in the forthcoming monetary policy announcement.
Q. In view of the recent IIP numbers, where do you see India's GDP growth in FY 08-09?
A. The growth in IIP has almost halved to average at 5.2% during Q1 FY09 as compared to 10.3% during Q1 FY08, indicating a moderation in the growth momentum during the current fiscal. Further, the IIP for capital goods has registered an average growth of merely 6.79% during Q1 FY09 as compared to 18.79% during Q1 FY08. The declining trend in the capital goods production is indicative of moderation in investment activity across industries. This is likely to have bearing on future industrial production and thereby economic growth. We expect the GDP growth to be around 8% during FY09.
Q. What will be the impact of higher inflation and lower GDP growth on rupee-dollar?
A. Rupee appreciation witnessed during the last year is unlikely to continue in the current year given the high inflation and slowdown in economic growth. Given the elevated level of oil prices coupled with increase in capital outflows, we expect the rupee to average at 42.3 during FY09 as compared to 40.24 in FY08.
Q. Do you see India decoupling any time soon with signs of global economic slowdown rising?
A. India's integration with the global economy has increased tremendously. India's trade (import and exports) as percentage of GDP has increased from 14.6% in FY91 to around 34.7% in FY08. Therefore, it is unlikely that the Indian economy will remain untouched in the event of a global economic slowdown. Given that domestic demand conditions may also be tempered in light of the interest rate hikes, decoupling is not likely.
6 months ago