New Delhi: A slowdown among developed economies may not have a major impact on India but pressures from high oil and food prices would make managing inflation a challenge in 2008/09, a top government panel said.
Slowing of the US economy has worried investors and policymakers and concerns have also surfaced that the US downturn was spreading to the 15-nation euro zone economy.
A report released by C Rangarajan, chairman of Prime Minister Manmohan Singh's Economic Advisory Council, said on Thursday expansion was expected to edge down to a still strong 8.5 per cent in fiscal 2008/09, and listed several downside risks.
"The Indian economy is much less dependent on the external markets than the Chinese economy," the panel's review of the economy said.
"While some export demand compression is likely to put an additional burden on our exports of goods and services, it is unlikely to be large enough to significantly depress growth."
"However, the flip side to this is that the pressure on prices of oil, food and other raw materials is likely to continue, making inflation management in 2008/09 quite challenging."
The report said the economy would grow 8.9 per cent in 2007/08, slightly lower than previously expected due to slowing manufacturing expansion following several rounds of monetary tightening, and sluggish output growth in power and mining.
Moderation Growth
Asia's third-largest economy has expanded at an average of 8.6 percent over the past four years and is poised for another year at a similar pace in 2007/08.
Finance Minister Palaniappan Chidambaram told a meeting in Gurgaon that a slight slowdown in the U.S. may have some impact on India's growth but it would not be drastic.
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"If the US goes into recession there will be global consequences and India will have to bear part of the global consequences," Chidambaram said.
India's economy is largely driven by domestic demand with exports playing a relatively minor role. It grew 9.4 per cent in the 2006/07 fiscal year, its strongest in 18 years and second only to China among major economies.
But annual growth dipped to 8.9 per cent in the September quarter, falling below 9 per cent for the first time in three quarters, as industrial output slowed due to monetary tightening designed to trim inflation.
Most forecasts peg India's growth at around 8.5 per cent for the fiscal year ending March 2009, slower than the scorching 9.4 per cent in 2006/07 and a unit of ratings agency Moody's forecast growth at 8.0 per cent for 2008.
Fuel Prices and Inflation
Policymakers are confident of maintaining growth momentum despite a surge in the value of the rupee against the dollar, higher interest rates and record global crude oil prices.
The report said the headline wholesale price inflation rate should go to a little over 4.0 per cent if domestic fuel prices are revised and remain stable around that level until the end of the fiscal year in March.
Inflation hit a two-year high of 6.69 per cent in January last year but softened after the Reserve Bank of India (RBI) tightened policy and the government cut duties on a range of items to calm prices.
A panel of top ministers is scheduled to meet later on Thursday to discuss revising fuel prices, a decision the government has been putting off for months, fearing it could lose public support ahead of federal and state elections.
The report said pressure on the rupee to appreciate was likely to continue in the immediate future and it urged the government to provide clear signals to enable industry to adjust to a higher exchange rate environment through productivity increases and by tapping the booming domestic market.
It said the approach to dealing with the exchange rate for the rest of 2007/08 would be continued intervention, accompanied by adequate sterilisation.
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