Indian economy to slow to 5.5% in 2009-10: US

After averaging at 8.8 per cent growth over the past four years, India's growth rate in 2009-10 is expected to slow down to 5.5 per cent mainly due to lower investment and declining external demand, the US Treasury Secretary Timothy Geithner has said.

"(India's) growth is expected to slow to around 5.5 per cent in FY 2009/10 (April-March) due to credit conditions and weaker external demand," Geithner said in the India section of his semi-annual report on International Economic Exchange Rate Policies.

The recently-announced policy measures to stimulate the economy and ease credit conditions should help cushion the downturn, he hoped.

Growth is slowing largely due to lower investment (reflecting tighter financing conditions and uncertainty) as well as declining external demand, although India is less export-dependent than many Asian economies.

It said year-over-year growth slowed to 5.3 per cent during the fourth quarter of 2008,  compared with 8.9 per cent in the same quarter in 2007; but on a seasonally-adjusted annualised basis, the economy contracted 2.9 per cent in the fourth quarter, the first contraction since early 2004.

Some slowdown might have been inevitable since India had sharply tightened monetary policy through mid-2008, was growing near or above capacity, and facing infrastructure and other structural constraints, but global developments have hastened the downturn, it said.

After tightening monetary policy through mid-2008 as inflationary pressures increased, the report said, the Reserve Bank of India (RBI) began slashing interest rates in the fall to combat the impact of the global financial turmoil and slow the deceleration of growth.

Since September 2008, the RBI has lowered the repo rate and cash reserve ratio by 400 basis points to five per cent and cut its reverse repo rate by 250 basis points to 3.5 per cent.

"These actions have injected approximately $82 billion in liquidity into the banking system," it said.

However, commercial credit conditions have not improved commensurately as risk aversion and sluggish bank deposit interest rates have disrupted monetary policy transmission, the report said.

According to the report, the US bilateral trade deficit increased to $3.1 billion in the second-half of 2008 from $1.1 billion in the second-half of 2007 as US exports to India fell.

The rupee depreciated by 13.2 per cent against the dollar in the second-half of 2008 with significant volatility in the final quarter of the year, but fell by only 4.8 per cent on a real effective basis, it said.