It
has been a mixed year so far for India after its long-term rating was raised to
investment grade in January. The central government''s budget deficit for fiscal
2006 (year ending March 2007) came in at 3.5 per cent of GDP, below the official
target of 3.8 per cent of GDP. This
keeps the sovereign''s medium-term fiscal deficit targets of 3.3 per cent of GDP
for fiscal year 2007-2008 and 3.0 per cent of GDP for fiscal year 2008-2009 intact.
However, focus
now is on whether the fiscal gains made over the past few years could be unraveled
by the Sixth Pay Commission which will submit its report in April 2008. Encouragingly,
inflation has fallen to 3.3 per cent, a near five year low in early-September,
from a two-year peak of 6.7 per cent in late January. Nevertheless,
inflation still remains a risk as the Reserve Bank of India continues to grapple
with a high level of excess liquidity in the system, record high international
oil prices, and rising local commodity prices, all of which could threaten its
inflation target of 5 per cent this fiscal year. The
central bank had already raised the cash reserve ratio by another half a percentage
point to 7 per cent in late July 2007 and followed up on this by drastically reducing
the limit on external commercial borrowings in early August from the previously
permitted $500 million to a mere $20 million, in an effort to manage this excess
liquidity. Although
some concerns have cropped up as India''s industrial production grew at the slowest
pace in nine months in July, growth is still expected to come in at a relatively
high 8.5 per cent-9.0 per cent this fiscal year versus 9.4 per cent last year.
Separately, the recent dispute between the Congress Party and its coalition ally,
the Communist Party of India over a US-India nuclear agreement has fueled talk
of early elections. This
could take place in early 2008, although the present government''s term only ends
in May 2009. In the short run, this political uncertainly and any possible delay
to critical reform measures could damage investor confidence and reduce the country''s
growth potential. However,
medium-term growth prospects remain intact as changes in government during the
past decade have not stopped the Indian economy from continuing on its strong
growth trajectory.
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