(EnergyAsia, May 21 2012, Monday) — Apart from growing at a projected slower rate of 7% this and next year, the Indian economy will face rising risks from its slow reform efforts, high oil prices, volatile inflation and the global economic crisis, said the business community and the International Monetary Fund.
In its report on the country issued last month, the IMF said that while growth remains high, India could be negatively impacted by the unsettled global outlook, slow government decision-making and poor investment outlook. India’s economy grew by 8% to 9% in the previous two years.
For most of 2012, inflation is projected to stay at around 7%, well above the Indian central bank’s target of 4.5% in the near term and 3% in the medium term.
The IMF has projected India’s current account deficit to widen to 2.8% of GDP on account of lower export earnings and higher import spending brought on by high oil prices.
While external risks are manageable for now, the IMF warned that a protracted downturn in the advanced economies could have “a sizable impact” on India’s growth.
It said a “sudden stop” of capital inflows from the region’s banks would complicate the financing of India’s current account deficit. Also, India’s large corporations present an important potential channel of contagion.
The IMF said energy prices are weighing heavily on the government’s assessment and response to India’s economic challenges.
“In 2008/09, sharply lower oil prices helped bring Indian inflation down, allowing for monetary easing while reducing the trade deficit. These beneficial effects have not occurred during the past year,” it said.
With limited progress on subsidy reforms and oil prices remaining firm, the IMF said India’s 2011/12 deficit target is likely to exceed the target by about 1% of GDP despite a slower pace of capital spending compared with previous years.
A midyear rise in fuel prices mitigated spending pressures, but the subsidy bill is still likely to exceed the budget by a substantial amount.
The situation has deteriorated in recent weeks as Indian businessmen warn of paralysis and a leadership vacuum in New Delhi while US ratings agency Moody’s gave the Indian government a ‘credit negative’ status for projecting a budget deficit of 5.9% for the current financial year.
Last week, the Indian rupee sank to a fresh five-month low of 54 against the greenback despite intervention from the central bank as Indian oil companies bought dollars to pay for rising oil imports.