As the Central Statistical Organization announced today, the Indian economy grew by 6% on a year earlier in the fourth quarter of 2009, substantially less than in the preceding quarter. This was mainly due to sharp falls in agricultural output: the weakest monsoon since the early 1970s resulted in severe crop failures. We view this slowdown in growth as a one-off blip. The underlying trend in growth remains intact. We expect the economy to accelerate again as early as this quarter. Growth in 2010 is likely to average well over 7%.
India: Poor harvest only a temporary drag on growth
India faces major economic policy challenges this year. For one thing, the budget deficit, which rose sharply in the wake of the financial crisis, needs to be reined in. At the end of the fiscal year in March 2010 the deficit looks set to reach 6.8% of gross domestic product. For another, inflation has risen sharply of late, not least due to the crop failures. In December 2009 year-on-year inflation stood at 15.1%. Twelve months earlier it had still been below 10%.
Should growth accelerate as we expect, the Indian central bank will use this environment to gradually raise its key rate in the course of this year. Having been slashed in several stages in the course of the crisis from 9% to 4.75%, since April 2009 the key rate has remained mired at the lowest level since late 2004. At the end of this year the key rate is likely to stand at 5.50%, 75 basis points up on its current level.
Gregor Eder
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