Economic slowdown and high inflation will be the two main challenges for the Indian economy in 2008-09, Crisil Managing Director and Chief Executive Officer Roopa Kudva said on Thursday.
"Our outlook as it currently stands, certainly we are seeing growth numbers coming down in the economy... Inflation worries are certainly there on the horizon," Kudva told reporters on the sidelines of a function.
She expects the Indian economy to grow 7.8 per cent this year, compared to 9 per cent last year. The Reserve Bank of India has projected 8.5 per cent growth during the current financial year.
But with inflation remaining high, Kudva said, she expects RBI to take more tightening measures.
Inflation based on wholesale price index rose to 11.91 per cent during the first week of July and the Crisil chief said that she expects average inflation of 8.5 per cent with moderation during the fourth quarter of the current financial year.
But she was optimistic on investment saying, "We have not seen a sharp scale back in investments. Companies are going ahead with their plans."
Bankers expect the investment rate to slow down in coming quarters due to higher interest rates.
RBI has increased the repo rate or the rate at which it lends to banks by 75 basis points this year, while the cash reserve ratio, or the share of deposits set aside with the central bank has been increased 125 basis points during the first quarter as part of the monetary tightening exercise.
Kudva said that higher interest rates and the slowdown in the economy may see the level of non-performing assets of Indian banks in the retail segment rise to 4 per cent of the total advances, compared to 2.4 per cent last year. In addition she said that small and medium sized developers will feel the impact of the slowdown.
She also pointed to the pressure on the fiscal position and said that the fiscal deficit could touch 6.5 per cent of GDP if the oil and fertilizer bonds and the outgo on account of the award of the sixth pay commission recommendations were included.
While the Centre has budgeted for a fiscal deficit of 2.5 per cent of GDP, economists are putting a higher number as the oil and fertiliser bonds are off-budget items with only the interest outgo shown on the balance sheet.
The value of the bonds will be added at the time of maturity. The average tenor of the oil bonds is seven years.
Citing the high fiscal burden, earlier this week, Fitch had lowered the local currency outlook from stable to negative while keeping the overall rating as BBB-, which is investment grade.
