Indian Economic Growth Will Slow To 8% This Year

Manufacturing growth has created large appetite for credit.

Indian growth should slow to 8% this year before picking up to 8.3% in 2008 despite higher inflation and a weaker agricultural sector, the Asian Development Bank said March 27. While India's growth momentum was robust in 2006, it also led to "high capital inflows and currency appreciation pressures," the ADB said in its annual Outlook report.

"Manufacturing and construction growth have stimulated a voracious appetite for credit, which in turn complicates attempts to control money supply," it said.

The construction sector, which plays a major role in the Indian economy, has been through a boom which drove gross domestic investment to 33.8 % of gross domestic product (GDP) in 2005, an upward trend that seems to be continuing. This investment binge has been met by growth in bank lending, which now is causing problems in reining in money supply, the ADB said.

While the federal government has tried to combat inflation with a raft of measures including a cut in tariffs on imported goods, including food, the results have been limited.

"Faced with demand-led inflation, the Reserve Bank of India needs to dampen expenditure," ADB said. "However, in doing so, it will be important not to reduce the credit available for expanding manufacturing capacity more than is necessary to contain inflation ... These capacity expansions are vital for enhancing growth potential in the medium- to long-term."

Copyright Agence France-Presse, 2007

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