India to grow at 7.8% this fiscal: Goldman Sachs

New Delhi (PTI) - Global investment banking
giant Goldman Sachs has slashed India's growth forecast for
this fiscal to 7.8 per cent on account of rise in interest
rates and a rising inflation, forecast at 7.5 per cent during
the period.
The estimate is way below the government's forecast of
9 per cent growth in 2011-12.
"We reduce our GDP growth forecasts for FY12 to 7.8
per cent from 8.7 per cent due to the impact of higher
rates...,"
Goldman Sachs said in its latest issue of 'Asia
Economics Analysts'.
The bank had earlier forecast that the Indian economy
would expand by 8.7 per cent, while the inflation would hover
around 6.7 per cent in 2011-12.
Goldman Sachs says the environment remains
challenging, with inflationary pressures persisting into the
economy.
According to its latest report, recent spike in core
prices suggest that the food and fuel shocks have been passed
through and inflation may remain elevated in 2011.
"We are raising our inflation forecast for FY12 to 7.5
per cent from 6.7 per cent due to the recent large upside
surprise in core prices," Goldman Sachs said.
Headline inflation has remained above 8 per cent since
February 2010. Overall inflation in March stood at 8.98 per
cent, much above the government's projection of 8 per cent.
Food inflation remained in double digits for greater
part of last fiscal, though it has shown signs of moderation
since March.
Indian Prime Minister Manmohan Singh had Thursday
admitted that inflation, specially of food items, is a matter
of concern for the government.
Goldman Sachs expects RBI would continue with it tight
monetary policy this year to staunch the inflationary
pressures.
"With inflation remaining the dominant macro concern,
we think that the RBI will keep liquidity tight in order to
pass through the policy rate hikes to bank deposit and lending
rates...
We now expect RBI to hike policy rates by another 125
bp in 2011, significantly higher than the market
expectations," Goldman Sachs said.
Reserve Bank of India (RBI) has already hiked key
policy rates eight times since March 2010, totalling to around
200 basis points, to drain out liquidity from the system.
Goldman Sachs, however, said that real interest rates
have actually fallen by about 100 basis points since November
2010 on account of higher inflation expectations.
"We think system liquidity may remain tight due to
government borrowing, a high credit-deposit ratio, and a
weaker balance of payments... Recently recommended changes to
the central bank’s operating procedures also state the
intention of keeping system liquidity tight, and banks in
borrowing mode," it said.
Goldman noted that from the production side, the main
slowdown in growth momentum comes from the industry due to the
rate increases.
"Agriculture should suffer from a high base from
FY11," it added.
According to the report, the country's fiscal deficit
is likely to be 5.2 per cent of GDP in 2011-12, higher than
the budget estimate 4.6 per cent.
"Fiscal policy may be unable to contract sufficiently
due to the subsidy burden of higher oil and fertilizer prices.
If higher oil prices are not passed through, the fiscal
deficit will likely be higher than the budget estimates...the
RBI would need to contain second-round effects of food and
energy shocks," it said.
Global crude prices have soared above USD 120 per
barrel as supplies from Libya, an OPEC member and key
exporter, have dried up on account of fighting between
government and rebel forces.
India imports three-quarters of its oil and gas, and
price of diesel continue to remain regulated.