markets have largely ignored the economic slowdown and financial turmoil in the
US. Although economies are even more tightly linked by trade and financial flows
than in the past, the US is no longer the only driver for growth in these economies.
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
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."
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."
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.
the prices of primary articles continue to exert inflationary pressure.
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
rates are clearly peaking, with the yields on government securities moving within
a narrow range and banks beginning to soften lending rates in many segments. It
is expected that the benchmark yield on 10-year government securities will remain
in the range of 7.8-8 per cent until the end of the year - March 2008. The Reserve
Bank of India is not expected to change the repo and reverse repo rates and the
cash reserve ratio (CRR) in its next quarterly announcement scheduled for 30 October.
The fiscal situation
remains under control, with very high growth in direct tax collections. The budget
target of 3.3 per cent for the fiscal deficit is expected to be easily met.
while global developments have made the environment more risky, the strength of
domestic demand is expected to keep the Indian economy on a relatively high growth
trajectory. The moderation from last year''s 9.4 per cent to 8.6 per cent this
year reflects a soft landing, taking the Indian economy closer to its current
trend growth rate, estimated at 8.5 per cent.