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India's days of more than nine per cent economic growth are over and the country has lost the opportunity to sustain those levels as well, believes global financial services major Citigroup.
"...the days of 9 per cent plus growth are over and we believe that India has lost the opportunity to sustain those levels for now, and we expect growth to come in around 7 per cent plus levels in FY'2009-10," Citigroup, in its latest economic and market analysis report for India, stated.
The report pointed out that further rate hikes do pose downside risks to Citi's FY'09 and FY'10 GDP estimates of 7.7 per cent and 7.9 per cent, respectively.
Country's industrial growth has plunged 3.8 per cent in May, as compared to 10.6 per cent a year-ago, due to a poor show of manufacturing and electricity sector.
According to government data released on Friday, industrial output, as measured by Index of Industrial Production, grew by just five per cent in the first two months of this fiscal, against 10.9 per cent during the same period last year.
However, in the coming years Citigroup does not expect trends to remain as favourable as the impact of monetary tightening kicks in.
"Our FY'09 and FY'10 GDP estimates of 7.7 per cent and 7.9 pert cent incorporate a deceleration in investments to 10.4 per cent and 7.9 per cent, respectively," Citi economist Rohini Malkani said in the report.
However, if the oil prices continue to face upward review, with the ongoing adjustment in other market determined fuels along with the pass through impact on manufactured products, it would result in edging the inflation even higher, the report added.
This would warrant further tightening, which coupled with increasing input costs, would slow down investments further, Malkani added.
The report highlighted that with inflation rearing its ugly head and market supply measures not yet being effective, the RBI has started its tightening cycle to ease demand.
However, this is occurring at a time when industrial growth has decelerated, which makes one think whether the coming year or so is likely to be a mirror image of what happened to India in the mid-1990s.
"We expect headline inflation to remain in the double-digit range and possibly cross 13 per cent levels. This assumes a moderate easing in primary product prices, a further rise in the fuel index incorporating an increase in electricity tariffs, and manufactured product index sustaining at nine per cent levels given the pass through of regulated
and unregulated fuels," Malkani said.
With market supply measures not really being effective in bringing inflation down, we expect the RBI to continue to raise rates to temper demand-side pressures, she added.
Besides, the financial services major expects a further downfall in Indian Rupee, however, government intervention could keep the INR in 43-43.5 level.
"The deceleration in capital flows coupled with oil at $135 per billion barrels indicates possible further rupee weakness. However, direct and indirect intervention could keep the rupee in the Rs 43-43.5 range," the report stated.
The report added that higher rates would impact growth but corporate India is in better shape today with improved productivity and higher savings.
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