With corporate investment expected to slow down in the face of the global economic crisis, the International Monetary Fund (IMF) projects India's growth to moderate to 6.25 per cent in 2008-09 and further to 5.25 per cent in 2009-10.
"After five years with average growth of 8.75 per cent, India's economy is slowing," the IMF said in a background paper on the IMF Executive Directors' assessment after the annual Article IV Consultation with New Delhi.
"Partly reflecting the deteriorating global outlook,(IMF) staff project India's growth to moderate to 6.25 per cent in 2008/09 and further to 5.25 per cent in 2009/10," it said, noting that India's Central Statistical Organization advanced estimates for 2008-09 (April-March) put real GDP growth at 7.1 per cent.
"Corporate investment -- the major growth driver during recent years -- is expected to slow because of weakening profitability and confidence, and tightening of financing conditions from foreign and non-bank sources."
"Policy measures to stimulate the economy and a good harvest should support domestic demand," IMF said. But "the uncertainty surrounding the forecast is unusually large, with significant downside risks. The main upside risk stems from a larger-than-anticipated impact of the stimulus measures that the authorities have already implemented".
After rising to nearly 13 per cent (year-on-year) in August 2008, headline inflation (wholesale price index) dropped to 4.4 per cent (y/y) at the end of January 2009.
With commodity prices waning and demand slackening, inflation is expected to fall further to 3 per cent (y/y) by March 2009 and to 2 per cent on average in 2009/10.
The current account deficit is projected at about 3 per cent of GDP in 2008/09, primarily due to a markedly higher oil import bill.
While export performance has deteriorated sharply in recent months, softer import growth is keeping the trade deficit in check. For 2009-10, the current account deficit is forecast to narrow to 1.5 per cent of GDP, reflecting lower oil prices and weaker domestic demand, the IMF said.
After last year's record of 9.2 per cent of GDP, capital inflows are expected to decline this fiscal year; until December 2008 portfolio investment recorded a $11 billion outflow and external commercial borrowing has slowed considerably, though there has been a mild recovery in portfolio investment since October 2009 and foreign direct investment (FDI) has held up relatively well.
While reserves have declined this fiscal year, from a historic peak of $315 billion in May 2008 to $252 billion as of Feb 6, 2009, they remain adequate compared to the country's gross financing requirement and imports.
As a result of the global crisis, the stock market index declined by over 50 per cent in 2008 and the rupee depreciated 23 per cent versus the US dollar and 13 per cent in nominal effective terms.
The IMF staff project the Indian central government deficit at about 7 per cent of GDP this year, including 1.25 per cent of subsidy-related bond issuance. The general government deficit, which includes the states' deficit, is forecast to rise to nearly 10 per cent of GDP.