Crude shock: Pranab mulls scaling down growth projection to 8%

India might have to settle with eight per cent growth in its gross domestic product (GDP) this year if the current level of oil prices did not recede, Finance Minister Pranab Mukherjee said here on Thursday, signalling a revision in projection aligned with that of the Reserve Bank of India (RBI).

Earlier this week, RBI had projected eight per cent growth in GDP for the year, one per cent lower than the government’s earlier outlook, on the back of rising oil prices, high commodity prices and persistent risks in the Euro-zone nations.

“If oil prices continue to exert its pressure at the existing level, it will be difficult for us to manage both inflation and higher GDP growth merely by resorting to domestic policies. Therefore, there may be a possibility that our GDP growth may come down to eight per cent from the projected level of nine per cent plus-minus 0.2 (per cent),” Mukherjee told reporters on the sidelines of the Asian Development Bank’s annual meeting.

 

Brent crude prices have almost doubled in the last year, supported, in part, by the ongoing political volatility in North Africa, and is hovering around the highest levels in about two-and-a-half years. India imports the majority of its crude oil requirements and is Asia’s third-largest oil consumer.

Inflation, Mukherjee said, would remain between 7.5 and 8 per cent, though the government was attempting at reducing it further using supply-side and demand-side management. “If you look at the nature of the inflationary pressure in India, initially, it was confined to the food items. But with the rising fuel prices it started spreading over and it affected other sectors,” he said.

“As far as the food inflation was concerned, it was substantially contributed by the supply-side contributions from the agriculture sector, which we addressed domestically. And with good agricultural production this year, it has been possible to ameliorate that inflationary pressure to a certain extent,” Mukherjee added.

On the demand side, he said, RBI — which has undertaken nine key policy hikes in just over a year — had ensured that “the excess liquidity has been mopped up from the market but in a way that will not adversely affect the GDP growth”.

RBI, in its monetary policy statement last Tuesday, hiked both the repo rate, at which it lends to banks, and the reverse repo, the rate at which the central bank borrows money from the lenders, by 50 basis points each.