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Indian growth engine to slow down, says HSBC

Last updated on: February 9, 2011 17:31 IST

Indian growth engine to slow down, says HSBC

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India's economic growth may slow down to a little over 8 per cent while inflation is likely to be above the comfort level at 6.6 per cent with an upward bias next fiscal, a senior economist from global banking major HSBC said on Wednesday.

HSBC has pegged India's GDP growth this fiscal at 9.1 per cent while it sees inflation by end-March at between 6.5 and 7 per cent.

"In FY 2012, we expect growth to slow down to 8.1 per cent, mainly on account of the base effect coming into play and a further tightening of monetary policy (by the Reserve Bank) to combat inflation," HSBC Chief Economist for India & ASEAN Global Research, Leif Eskesen, told reporters on Wednesday.

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The Reserve Bank is likely to further hike its key rates by up to 1 per cent (100 basis points) in calendar 2011, he said, as inflation is expected to hover close to 7 per cent.

While the momentum in the services and manufacturing sectors has held up well so far, it is expected to slow down going forward leading to a slackening in growth, Eskesen said.

"India's growth (in FY 2011) is being fuelled by strong private domestic demand. Momentum in both the manufacturing and services sectors has held up very well--there is a strong growth momentum," Eskesen said.

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Expressing concern over inflation which he saw remaining above comfort-level, Eskesen said that a lot of focus has been given to supply-side factors but there is a need to look at the demand-side as well, with demand-driven pressures being felt on food prices in H2 2010.

"Despite a good monsoon last year, food prices have risen, a part of it due to consumption of proteins (shift in eating habits) as income-levels have risen on the back of a growing economy," he said.

Wage pressures are also building up, he said, adding HSBC sees inflation at 6.6 per cent in FY 12 with an upward bias.

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"In our view, the (RBI's) monetary policy is still accommodative...hence, we feel a 1 per cent hike in rates is likely," the HSBC official said.

On fiscal deficit, Eskesen said that the government must make efforts to achieve its target of 4.8 per cent of GDP next fiscal but warned that it could be 'tricky' to meet the target in the absence of a one-time bonanza such as 3G spectrum auction.

The government will have to look at both the revenue and expenditure sides for this, he said. On the revenue side, there is a scope to widen the tax base, strengthen tax administration and improve tax compliance while on the expenditure side, there is a need to continue with subsidy reforms.

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"However, with high inflation, the government may not tinker with subsidies now," he said.

The economist also called for a focus on low-cost, labour-intensive manufacturing pointing to India's concentration on capex-intensive manufacturing so far.

"India now needs to focus on growing its manufacturing and fire it up as an engine of growth along with the services sector," Eskesen said.


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