India Prepares for Slowdown In Economic Growth

India Prepares for Slowdown In Economic Growth
As Inflation Soars, New Delhi Weighs Curbs on Exports

By JACKIE RANGE
April 22, 2008

NEW DELHI -- India's finance minister signaled the nation's growth rate could slow this fiscal year and that the government is prepared to ban exports in more industries in a bid to stanch rising inflation.
"Anything between 8% and 9%" growth in gross domestic product in the year ending March 31, 2009, is "welcome and acceptable," said Finance Minister P. Chidambaram.
Some economists forecast that India's economy, after averaging growth just shy of 9% for the past five years, may slow to about 7% this year because of the slowdown in the global economy.
Mr. Chidambaram said in an interview that it was too early to make a specific forecast because the direction of the economy would be clearer after the monsoon season and the subsequent harvest. India's monsoons start sweeping across the country about June and continues to about September. But he added, "We must aim at 9%, as I will, and we must be happy if it's between 8% and 9%." India's GDP rose by 9.6% in the year ended March 31, 2007, and is estimated by the government to have grown by 8.7% in the year ended March 31.
Mr. Chidambaram said soaring prices of rice and other basic food items are a worry. "It is a matter of concern in a developing country and in a country where a large number of people are poor and the bulk of household expenditure is for food," he said.
High food prices also are fueling rising inflation in India, as well as inflationary expectations. Wholesale-price inflation is running in excess of 7% on an annual basis. India's rising consumption, as household incomes increase, also is driving inflation higher. The upper limit of the government and central bank's comfort zone for inflation is close to 5%.
• The News: India's finance minister said India should be happy with GDP growth this year of 8% to 9% and the government would consider further export bans to fight inflation.
• The Background: India, after a few years of red-hot growth, is seeing some slowdown while inflation is above the comfort level.
• What's Next: The government will try to tamp inflationary expectations.
"Inflationary expectation is driving prices," he said. "So we have to break this expectation by telling people that prices will moderate, they should not buy more than what they need to buy and they should not pay more if they think that the price rise is unjustified." Inflation also is being stoked by a mismatch of supply and demand, he added, and by cartel-like behavior in some sectors of the economy. The Monopolies and Restrictive Trade Practices Commission, India's antitrust regulator, has begun inquiries in the rubber, cement and steel sectors, he said.
The government also has cut some exports and taken action to reduce food prices, such as banning the export of rice other than basmati and increasing the minimum export price of basmati rice, one of India's signature exports.
The government would consider further bans, Mr. Chidambaram said, even though he acknowledged that such moves go against the principles of free trade. "As a short term measure...we will consider such bans, too." India's ministries of steel and commerce have proposed some export bans in the steel sector, he pointed out. But further bans on food exports are less likely because "export of food items is virtually banned" already, he said. India's government has been making moves aimed at lowering food prices, both by banning exports and reducing import duties. For instance, it recently prohibited export of all edible oils.
Indian authorities have been moving to stem inflation. Thursday, India's central bank effectively restricted the amount of money banks can lend. Despite India's high inflation, the much needed build-out of the country's infrastructure isn't being hurt, Mr. Chidambaram said. "All the indicators are that investments that are in the pipeline continue to remain buoyant and robust," he said.
Despite an 18% drop in the country's benchmark stock-market index this year, Mr. Chidambaram said India still remains a good place to invest. He pointed out that in the year ended March 31, 2006, investor returns from the stock market were 40%, as they were for the following financial year. In the year to March 31, 2008, despite recent declines in the stock market, the overall annual return was about 27%, he said.
MORE FROM P. CHIDAMBARAM

"The distance between India and China is in fact increasing, not reducing, because China's growth rate is faster. We want to catch up with China, but that requires greater political consensus on the needed reforms." Read the transcript.
"This still remains one of the most attractive markets for any investor," the finance minister said. "The question is no longer, 'Shall I invest in India?' The question is, 'Can I afford not to invest in India?'"
The divergence between India's growth rate and that of China is a cause for concern, he said. China recently reported first-quarter GDP growth of 10.6%. "We want to catch up with China," said the finance minister, pointing out the distance between the two countries' growth paths was increasing. But catching up requires "greater political consensus on the needed reforms" in India.
India is governed by the United Progressive Alliance, an uneasy coalition between the Congress Party and others including Communist parties, which tend to oppose reforms that would further liberalize the economy. China's one-party government can be quicker in spurring economic growth, he said.
"They are in the position to take some decisions which we are not," said Mr. Chidambaram. "We have to follow a process that is more consultative, more deliberative and more amenable to judicial scrutiny."