India’s government predicted the economy will expand the most in three years, supporting Reserve Bank of India’s case for raising interest rates further after the steepest increases in Asia.
The US$1.3 trillion economy will probably expand 8.6 percent in the year ending on March 31 from a year earlier, the Indian Central Statistical Organisation said in a statement in New Delhi yesterday. The projection was in line with the median of 16 estimates in a Bloomberg News survey.
India, battling inflation stoked by rising consumer demand and food costs, is bracing for the impact of a possible spurt in oil prices following political unrest in Egypt, Reserve Bank of India Deputy Governor Subir Gokarn signaled on Sunday.
Indian Prime Minister Manmohan Singh on Friday said the country needs to tackle inflation with “great urgency” to sustain the economy’s momentum.
“Inflation risks are growing rapidly,” Shubhada Rao, chief economist in Mumbai at Yes Bank Ltd, said before the report. “Another rate increase next month is a huge possibility.”
Reserve Bank of India Governor Duvvuri Subbarao on Jan. 25 raised the key repurchase rate by a quarter-point to a two-year high of 6.5 percent and pledged “persistence with the anti-inflationary monetary stance” as he boosted the nation’s inflation forecast.
Subbarao said India’s benchmark wholesale-price inflation rate may be at 7 percent by March 31, more than the earlier estimate of 5.5 percent. The gauge stood at 8.43 percent in December. He maintained the central bank’s growth projection for the current financial year at 8.5 percent with an “upward bias.”
“A whole set of events unfolded in the Middle East which are starting to have an impact on oil prices and that is something which we didn’t anticipate at the time of making the policy announcement on Jan. 25,” Gokarn said on Sunday in Dabolim, in the western Indian state of Goa. “It is going to have an impact on our thinking, on our actions going forward.”
Subbarao, who has raised rates the most among Asian central banks in the past year, last month urged the government to cut subsidies including that on oil, saying “monetary policy works most efficiently while dealing with an inflationary situation when the fiscal situation is under control.”
While subsidies may contribute in the short term to keep supply-side inflationary pressures in check, they may “more than offset” this benefit by adding to aggregate demand, Subbarao said.
The comments build pressure on Indian Finance Minister Pranab Mukherjee to cut the budget deficit, which has almost doubled in three years. Mukherjee, who is scheduled to announce this month the budget for the fiscal year starting on April 1, is aiming to narrow the budget gap to 5.5 percent of GDP in the year ending on March 31. That compares with a shortfall of 2.7 percent of GDP in the year ended in March 2008.
In the last budget, Mukherjee increased the excise tax rate on manufacturers to 10 percent from 8 percent. It stood at 12 percent before the global financial crisis.
Rao said Mukherjee may boost the excise tax rate to 12 percent in next year’s budget.
Companies including Godrej Consumer Products Ltd, India’s second-largest maker of bath soap, say higher taxes would hurt profit, already squeezed by rising input costs.
Godrej, which raised prices last month, may follow with more increases as “raw material costs are going up,” company chairman Adi Godrej said in an interview with Bloomberg News on Friday.