India’s growth may remain “subdued” in the financial year to March 2013 as inflation curbs consumption and restrains interest-rate cuts, the Organization of Economic Cooperation and Development said.
“The economy has slowed, with the weakness focused in manufacturing and investment spending,” the Paris-based OECD said in a report today. “As a result, growth is expected to remain subdued through much of the year.”
The report reinforces concern India’s outlook has worsened because of trade and fiscal deficits, political gridlock, elevated inflation and the threat to global growth from Europe’s debt crisis. The risks pushed the nation’s currency to a record low yesterday, past 55 to a dollar.
India’s economy will expand 7.3 percent in the year ending March 31, and 7.8 percent the following year, the OECD estimates. The wholesale-price index will rise 6.7 percent this financial year, and 6.5 percent next year, it said.
The Reserve Bank of India lowered the repurchase rate on April 17 for the first time since 2009 by 50 basis points to boost growth. The monetary authority signaled inflation might limit the room for further cuts, flagging price risks from the fiscal deficit, energy costs and a weaker rupee.
Inflation may remain “uncomfortably high” for some time, the OECD said, with a further delay in pass-through of energy costs leading to more oil subsidies and a wider fiscal deficit.
Subsidies in the year ended March overshot the official estimate by 51 percent to 2.16 trillion rupees ($39.3 billion). The government plans to curb expenditure on subsidies to 1.9 trillion rupees, or 2 percent of gross domestic product, in the year that started April 1, according to budget documents.
“Continued policy uncertainty, including as regards further fiscal slippage, would weaken investment sentiment and result in softer near-term growth and an erosion of longer-run prospects,” the OECD said.
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