India Govt Panel Cuts Growth Forecast To 8.5%.

The top economic adviser to India’s prime minister has cut his estimate for economic growth in the current fiscal year by half a percentage point to 8.5 percent, citing inflationary pressures.

The Indian government has targeted 9.0 percent growth for the year to March 31, 2012, up from expansion of 8.6 percent last year, but the battle against stubbornly high inflation is threatening to derail those plans.

The “persistence of high inflation is inimical to medium-term growth,” C. Rangarajan, chairman of the Prime Minister’s Economic Advisory Council, said in an interview with Dow Jones Newswires published Friday.

He was the first government official to cut expectations on economic growth.

Rangarajan’s lower growth forecast came after the central bank earlier in the week projected even slower expansion of 8.0 percent for fiscal 2011-12.

Hiking interest rates for the ninth time in 15 months, by a bigger than expected 50 basis points, the bank said short-term economic growth may have to be sacrificed in the fight against inflation. Inflation in India has been at uncomfortably high levels for well over a year now, and is currently running at around 9.0 percent.

“The central bank will continue to follow a policy of tightening until inflation shows definite signs of decline,” Rangarajan said. “The primary concern of the central bank is with inflation and if inflation rate comes down, let us say, to less than seven percent, then perhaps the RBI (Reserve Bank of India) might just stop further tightening,” he added.

Controlling prices is an overriding priority for Prime Minister Manmohan Singh’s Congress-led government, with poorer households — the backbone of the Congress party’s support — especially hard-hit by rising food and fuel costs.

At the same time, the government says it needs double-digit economic growth to overcome crushing poverty in the nation of 1.2 billion people. Rangarajan also said it would be tough to stick to the government’s budget deficit target, as the risk of ballooning subsidies mounts following a months-long rally in crude oil prices.

The budget aims to cut the fiscal gap to 4.6 percent of gross domestic product this year and 3.5 percent by March 2014 from 5.1 percent estimated for the last fiscal year. India imports nearly 80 percent of its crude needs and the government provides a subsidy to state-run fuel retailers to sell diesel and cooking fuels below cost.

The government has budgeted 200 billion rupees ($4.47 billion) to compensate oil companies in the next fiscal year, and the subsidy burden would rise if crude prices jump.

“The biggest contribution that fiscal policy can make is to ensure that fiscal deficit doesn’t exceed the budgeted aim and that itself will be a difficult task,” Rangarajan said.

Source : dailytimes.com.pk