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Growth beyond 7 % will fuel inflation: Moody’s

Special Correspondent
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Calls for significant structural reforms

In a policy reiteration of what Indian policymakers and monetary authorities are well aware of, Moody’s has warned the government that pitching for GDP (gross domestic product) growth beyond 7 per cent to double digits in the absence of ‘significant’ structural reforms would fuel inflation and lead to ‘more painful’ adjustments in future.

In its report on India, the global rating agency’s arm, Moody’s Analytics, said: “Some government policymakers, most notably RBI Governor D. Subbarao, have begun pushing for a return to double-digit growth. This is wildly optimistic and, without significant structural reform, a dangerous view to take.”

Evidently, Moody’s caution call stems from the fact that earlier this week, the RBI Governor had stated that a growth rate of 5-6 per cent is not sufficient for the country’s economy, especially when it has the potential to grow by double digits, provided some issues are addressed. “If we do the right things, we can get back on the track of the double digit growth,” Dr. Subbarao had said.

Ostensibly, by saying “if we do the right things”, Dr. Subbarao had given enough indications on the need for structural reforms to take the economy on a higher growth trajectory.

Moody’s sought to remind the country’s policymakers that the government in pursuit of double-digit growth three years ago had “kept policy settings too loose for too long, causing the economy to overheat’’ which, in turn, led to the current problems of high inflation and a widening current account deficit. The obvious reference is to the fiscal and monetary stimulus measures that were put in place by the authorities to combat the impact of the global meltdown.

“Policymakers should end any pretence that the economy can grow at 10 per cent without fanning inflation — it simply cannot… Anything above 7 per cent [GDP growth] will lift inflation and result in a more painful future adjustment,” Moody’s Analytics said.

While the Indian economy is officially estimated to grow by 5 per cent this fiscal and the Finance Ministry has projected a growth rate of about 6.1-6.7 per cent in 2013-14, Moody’s ‘India outlook’ report has pegged the GDP growth at 6.2 per cent in 2013, up from 5.1 per cent in 2012.

The report pointed out that while the global environment has stabilised in recent months with Europe muddling through and most of the U.S. data looking better, the biggest change in India is that the government is now on a steady path of fiscal and regulatory reform and better governance. With economic reforms announced since August helping to lift corporate confidence and which should translate into better spending and capital expenditures from mid-2013, risks around the economy, particularly the fiscal and current account deficits, have begun to recede, it said.


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