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India growth forecast cut to 7%

INDIA'S central bank cut its growth forecast today to 7 percent --down from a prior estimate of 7.5 to 8.0 percent -- and warned of a deep, protracted global downturn, but left key interest rates unchanged.

Industrial production and consumer demand has slowed, business confidence is deteriorating, and the fiscal deficit is sharply up, the bank said.

Growth in the service sector, a key segment of India's economy, is also slowing. After 14 quarters of double-digit growth, growth in India's service sector slipped to 9.6 percent during the July-September quarter, the bank said.

Reserve Bank of India Governor D. Subbarao said that a recovery may not come until after 2009.

"The global crisis will dent India's growth trajectory as investments and exports slow. Clearly, there is a period of painful adjustment ahead of us," he said in the bank's quarterly policy review statement.

"However, once the global economy begins to recover, India's turnaround will be sharper and swifter, backed by our strong fundamentals and the untapped growth potential," he said.

Subbarao also noted that the global slowdown clearly shows that emerging economies remain closely linked to developed markets. "Contrary to the expectation of decoupling, which was a commonly held view even till recently, the crisis has spread to the emerging economies too," he said.

India has already taken aggressive measures to boost growth, since September announcing two fiscal stimulus packages and pumping 3.9 trillion rupees (US$79.5 billion) into the financial system.

Last quarter, the bank cut the repo rate -- at which the central bank makes short-term loans to commercial banks -- from 9 to 5.5 percent, and the reverse repo -- the rate at which it borrows from commercial banks -- rate from 6 to 4 percent, both historic lows. But economic growth has continued to slow.

Over the last five years, India's economic growth averaged 8.8 percent a year. Gross domestic product growth from April to September was 7.8 percent, down from 9.3 percent for the same period the prior year.

The bank urged commercial banks to pass on easing credit to consumers more swiftly, noting that a few banks have yet to lower lending rates.

Despite the central bank's aggressive rate cuts - and a 4 percentage point cut in the cash reserve ratio, or the amount of cash commercial banks must keep on hand -- commercial banks, fearful of rising bad loans, have reduced their rates to consumers by just 1.5 to 2 percentage points, according to Citigroup.

"To arrest the moderation in economic growth, it is critical that banks expand the flow of credit to productive sectors of the economy and do so at viable rates," the reserve bank said in its statement.

India's fiscal deficit surged 83.3 percent from April to November, after falling 11.0 percent the same period the prior year.

Reduced tax collection and stimulus spending is expected to put even more strain on the budget, potentially pushing the fiscal deficit from 2.5 to at least 5.9 percent of GDP, the bank said. Counting the cost of oil subsidies, the deficit could hit 8 percent of GDP, the bank said.

India's most-watched inflation indicator, the wholesale price index, has fallen by more than half since August, hitting 5.6 percent as of Jan. 10, due largely to falling commodities prices. The bank predicted inflation would fall still further, to 3 percent by March.

Consumer prices have fared less well, thanks to persistently high food costs, the bank said. Consumer price inflation is still in the double digits, the bank warned.


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