S&P Forecasts 8.6% Economic Growth

MUMBAI: Ratings firm Standard and Poor’s has said the economy may grow by 8.6% this year. Though agriculture could clock a higher growth, industry growth may slowdown on account of higher inter-est rate.

The turmoil in the US has been ignored by emerging markets as the US is no longer the only driver of economic growth, it said. The losses from recent sub-prime crisis in the US housing market is ex-pected to be around $150-$200 billion, according to estimates by the US Federal Reserve. However, the short-term concerns for the Indian economy remain if the country has to go for a poll in the near-term, according to S&P chief economist David Wyss.

In its recent mid-year review of the economy, India’s GDP growth is expected to be 8.6% during 2007-08. According to S&P chief economist (Asia-Pacific) Subir Gokarn, a key contributor to this performance is the agricultural sector, which, on the basis of a good south-west monsoon, is expected to grow by 3.4%.

The industry, reflecting the cumulative impact of rising interest rates and rupee appreciation, will grow by 9.2%, somewhat slower than last year, but a still healthy rate reflecting continuing buoy-ancy in investment spending. Services are expected to grow by 10%, based on strong domestic demand.” As for the global outlook, Wyss, said emerging markets are now driving world growth, a turnaround from recent decades. Last year, China accounted for 30% of the increase in world GDP on a purchasing-power parity (PPP) basis, compared with only 12% for the US.

This year, the slower US growth will reduce its share to only 9%, while China’s share will rise to 33% and India’s to 12%. The world economic growth is expected to remain strong in emerging markets because of healthy domestic demand conditions and export strength to non-US markets. “The fact that the US slowdown is concentrated in housing, which has relatively low im-port content helps.” Wyss said. Inflation in India is expected to end the year with an average of 5%. The headline figures are, however, understated due to the in-complete pass-through of international crude oil prices to domestic consumers.

The recent rupee appreciation has offset some of the recent increase in the dollar price of crude. However, despite this, it is estimated that a complete passthrough would increase the inflation rate by a percentage point.

The pressure on the rupee to appreciate remains, according to Go-karn. Notwithstanding the widening trade deficit, the current ac-count deficit remains well within the boundaries of expected capital inflows. Recent measures to curb external commercial borrowings and expand outward investment limits by Indian companies and individuals are, however, not expected to change the balance in the short term. However, S&Ps expects that RBI will resist apprecia-tion beyond current levels and the rupee will end the year at around Rs 40.5 /$