StanChart sees 8.1% GDP for FY12 inflation at 7.9%

Global banking giant StanChart today projected India's economic growth to slow down to 8.1% in 2011-12 in view of continuing inflationary pressure and high interest rates.

In 'India Chartbook: Q1-2011' report, the banking major also said that average inflation will be 7.9% this fiscal due to pressure from high commodity prices, forcing the Reserve Bank to further hike key policy rates.

"Local headwinds -– inflation, higher rates and governance risk -– are likely to slow growth to 8.1% in FY12 from 8.5% in FY11, with a more pronounced effect in first half of FY12," StanChart said.

This is much below the government's initial projection of 9% growth in 2011-12.

StanChart said that although private consumption has been on an upswing, the growth in investments has been hit by inflation, higher interest rates and increased risk in the area of governance like the recent political confrontations due to various scams.

"The government spending is also likely to provide limited support in FY12...Rising commodity prices and lower remittances from West Asia due to geopolitical tensions in the region may be a drag on growth in the coming quarters," the report said.

Between 2005-06 and 2007-08, the Indian economy grew by over 9% annually, before the global economic meltdown had slowed down the GDP growth to 6.8% in 2008-09.

However, in 2009-10, the economy rebound with 8% growth, and the government has projected it to clock over 8.5% in the just-concluded FY11.

StanChart said industrial growth this fiscal will slow to 7.8%, from 8.1% projected in 2010-11, while services sector will also see moderate rise due to slower industrial activity.

On infrastructure, it said: "Recent policy reforms provide some impetus for infrastructure development, but resource constraints and implementation issues are challenges to the $1 trillion infrastructure spending plan."

The government plans to invest $1 trillion in the infrastructure segment in the 12th Plan period (2012-17).

StanChart's report said that inflation in this fiscal will be in excess of the 5% comfort zone.

"We forecast average WPI inflation in FY12 at 7.9% year-on-year. While this is lower than 9.1% in FY11, it will far exceed the RBI’s usual comfort zone of 5-5.5% as commodity prices remain high," it said.