India’s GDP growth may dip to 7%: World Bank

Special Correspondent

On account of its current tight monetary policy that led to slowdown in demand for industrial goods

Strengthening of the rupee hits exporting community

Large remittance flows, growth in wage rates are positive factors

NEW DELHI: The World Bank has projected India’s GDP (gross domestic product) growth to slow further to seven per cent in 2008 on account of the tight monetary policy in place as a measure to rein in inflation leading to a consequent slowdown in demand for industrial goods.

In its report on ‘Global Development Finance’ released on Tuesday, the World Bank said: “GDP growth in India eased to a still strong 8.7 per cent in 2007, from 9.7 per cent in 2006, and is projected to slow further to 7 per cent in 2008.” The Bank attributed the moderation in the country’s economic growth to the “monetary tightening in 2007 [that] led to softening in domestic demand.”

The report pointed out that although the restrictive monetary policy measures prevented a further surge in the inflationary spiral, the resultant strengthening of the rupee proved detrimental to the exporting community. With the country’s industrial production decelerating to three per cent in April this year, the report noted that there were growing signs of the economy cooling down. However, thanks mainly to the large remittance flows and robust growth in wage rates, the industrial slowdown has not led to a fall in the rate of consumption, it said.

Alongside, the report noted that owing to an overall slowdown affecting most economies, the global GDP growth is projected to slide from 3.7 per cent in 2007 to 2.7 per cent in 2008.

Surge in food prices

Aggravating the situation was the worldwide surge in food prices in 2008 and there was a “sharp reduction in purchasing power of the poor,” owing to the increasing gap between wages and food prices. However, the report pointed to the export restrictions imposed by countries such as India, China and Vietnam as the major reason for the soaring global prices of food commodities.

“Among other factors, rice producers such as China, India and Vietnam have introduced export restrictions to keep stocks for domestic use and to prevent sharp domestic price increases; these policies have contributed to the increase in international grain prices,” the Bank said, while noting that “India is self-sufficient, but grain stocks are low and crop production has been on the decline”.

The report pointed out that soaring food prices had become a serious concern in South Asia by early 2008, mainly because food insecurity in the region was relatively high and the rural population have to spend over 50 per cent of their total income on food. It noted that the rapidly rising gap between food prices and wages indicated a sharp reduction in the purchasing power of the poor and the situation had become increasingly acute across the region, especially in Bangladesh and Afghanistan.

Referring to the global turmoil in financial markets, the Bank noted that the turbulence had adversely affected the Indian stock market as well.

“The turmoil in international financial markets...has affected the region primarily through fallouts and weakness in equity market. The latter has been most pronounced in India, particularly during the first quarter,” the report said.