India's scorching economic growth likely to show a slight slowdown

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NEW DELHI, Aug 30 (AFP): India's scorching economic growth will likely show a slight slowdown in first quarter data due Friday and risk of a sharper deceleration looms if the US subprime crisis persists, economists said.
Gross domestic product growth for the three months ended June 30 was seen at around 8.9 per cent with a range of 8.5 to 9.2 per cent, according to eight economists surveyed by the news agency.
The figure was down slightly from the previous quarter's 9.1 per cent growth, but still strong, underpinned by an industrial and services boom. The economy expanded by 9.4 per cent in the fiscal year to March 2007, the fastest pace in 18 years, buoyed by demand from an increasingly affluent middle class.
Friday's data "will continue to reflect the positive impact of the winter crop, still firm industrial production as evident from industrial production numbers released so far which average 11 per cent and sustained growth in services," said Manika Premsingh, economist at Edelweiss Capital.
But "we expect the impact of monetary tightening to be visible from the next quarter onwards when we see a correction in growth figures-both in industry and services," said Premsingh, who expects full-year growth of 8.2 per cent.
Already sales of cars, motorbikes and trucks have dropped as higher rates have hurt loan demand. Consumer durables spending has also fallen and exports are under pressure with the rupee at near decade highs against the dollar.
Most economists forecast full-year growth of 8.0 to 8.5 per cent although some see it as high as nine per cent. The central bank, which expects growth of 8.5 per cent, began tightening monetary policy in 2004 to tame prices.
Inflation at 4.10 per cent now is well below the bank's 5.0 per cent annual target and down sharply from a two-year peak of nearly seven per cent in early 2007.
The bank could start cutting rates toward year end as credit growth drops from over 30 per cent annually and the economy slows, analysts say.
India's solid industrial and service underpinnings would protect the economy against a major hit from the global liquidity squeeze triggered by the subprime credit crisis, some said.
"The direct and indirect exposure of the Indian banking sector to the subprime woes is limited and does not pose a threat to either the local banking system or to the economy," said Rajeev Malik, economist at JP Morgan.
But others said the subprime turmoil could cause a "significant" slowdown.
"We believe that a favourable sustained global risk appetite trend has been at the heart of India's current growth acceleration cycle," Morgan Stanley economist Chetan Ahya said in a research note in mid-August.
"If the current global risk aversion trend continues for more than three months, we believe India could face a significant deceleration in growth."
Over two billion dollars in foreign money has exited India's stock market in August alone amid greater risk aversion and fund repatriation.
"While less than some of the emerging markets, India will also suffer slower external demand support in the event current global financial markets problems weigh on global growth," Ahya added.
The fast-growing outsourcing and IT sector which accounts for 5.4 per cent of GDP fears a possible US economic slowdown could hit budgets of companies which farm out work to India to cut costs.
If the financial crisis lasted beyond October, growth could take a bigger hit, said DH Pai Panandiker, head of RPG foundation, an economic think-tank.
"If investment, which is the main driver of the economy, is delayed we may have eight per cent growth for the year instead of nine per cent," he said.