Regional economies immune to US credit woes says S&P, pegs 2007-08 Indian GDP growth at 8.6 per cent

09 October 2007

In a mid-year review of the global economy, Dr. David Wyss, chief economist, Standard & Poor''s observed, "Emerging markets are now driving world growth, a turnaround from recent decades. Last year, China accounted for 30 per cent of the increase in world GDP on a purchasing-power parity (PPP) basis, compared with only 12 per cent for the US. This year, the slower US growth will reduce its share to only 9 per cent, while China''s share will rise to 33 per cent and India''s to 12 per cent."

Wyss added, "global growth remains strong despite the weaknesses seen in the US economy - especially in emerging markets because of healthy domestic demand conditions and export strength to non-US markets. The fact that the US slowdown is concentrated in housing, which has relatively low import content helps."

India''s GDP growth is expected to be 8.6 per cent during 2007-08. Dr Subir Gokarn, chief economist, Standard & Poor''s, Asia Pacific, explained, "A key contributor to this performance is the agricultural sector, which, on the basis of a good south-west monsoon, is expected to grow by 3.4 per cent. The industrial sector, reflecting the cumulative impact of rising interest rates and rupee appreciation, will expand by 9.2 per cent, somewhat slower than last year, but a still healthy rate reflecting continuing buoyancy in investment spending. Services are expected to grow by 10 per cent, based on strong domestic demand."

While inflation, measured by the wholesale price index, is expected to end the year with an average of 5 per cent, it is, however, understated due to the incomplete pass-through of international crude oil prices to domestic consumers. Recent rupee appreciation has offset some of the recent increase in the dollar price of crude. However, despite this, it is estimated that complete pass-through would increase the inflation rate by a percentage point.

Overall, the prices of primary articles continue to exert inflationary pressure.

Commenting on the appreciating rupee, Dr. Gokarn said, "The pressure on the rupee to appreciate remains. Notwithstanding the widening trade deficit, the current account deficit remains well within the boundaries of expected capital inflows. Recent measures to curb external commercial borrowings and expand outward investment limits by Indian companies and individuals will not change the balance in the short term. However, we expect that the Reserve Bank of India will resist appreciation beyond current levels and the rupee will end the year at around Rs40.5 to the dollar."