CRISIL expects agriculture to grow at 3%

April 22, 2008 - India

CRISIL has revised its GDP growth forecast to 8.1 per cent for 2008-09 from the earlier forecast of 8.5% in view of the worsening inflation, interest rate and global growth outlook. Some moderation notwithstanding, the overall growth scenario is expected to remain strong with investment as the main driver.

Domestic private consumption demand will also provide some support to the economy against slowing external demand. Sectoral forecasts for industry and services have also been adjusted downwards to 8 per cent and 9.8 per cent respectively. Assuming a normal monsoon this year, we expect agriculture will grow at 3 per cent.

Mr. Dharmakirti Joshi, Principal Economist, CRISIL, elaborates, "Our earlier GDP forecast of 8.5 per cent had assumed a cut in the policy interest rate by the central bank in response to the slowing economy.

This is now ruled out since current inflation and inflationary expectations are way beyond the RBI's comfort zone of 4.5 to 5.0 per cent. This, coupled with, the recent scaling down of global growth projections has resulted in us revising our growth projections downwards for 2008-09. The growth will be slower but still a healthy 8.1 per cent."

The current pressure in inflation is from primary commodities and oil - a worldwide phenomenon related to the supply crunch which is not expected to ease soon. As a consequence, despite growth deceleration, we expect inflation at an average of 5.5 per cent in 2008-09 undera normal monsoon scenario.

While inflation is expected to remain high in the next few months due to a continuation of global pressures and an unfavourable base effect, we expect it to soften towards the end of the year. If monsoons are sub-normal and agricultural production falters, inflation scenario could worsen.

The Reserve Bank of India (RBI) has consistently maintained that containing inflation within its target zone is its primary objective.

Given high inflationary expectations, The RBI has already raised CRR by 50 basis points ahead of the policy announcement. This will exert upward pressure on interest rates. CRISIL has revised the 10 year G Sec rate upwards accordingly to 7.7-7.9 per cent by March 2009.

The fiscal situation is also under increased pressure. Growth in tax collections is expected to decline as GDP growth moderates, with a further loss of revenues on account of recent duty cuts to tame inflation.

The subsidy bill on fuel and fertilisers is set to rise due to the global food and crude price scenario. CRISIL's forecast on fiscal deficit for 2008-09 based on the above factors has been revised upwards to 3.9 per cent of GDP inclusive of the off-budget items.