News: 'Economic growth to slow to 8% in 06/07'

(RTR 28/11/2006) Mumbai - Economy is showing signs of overheating, but growth will slow to 8 percent in the current 2006/07 fiscal year (Apr-Mar) and to 7.5 per cent in 2007/08 as tighter monetary policy takes hold, the OECD said on Tuesday.

The central bank is expected to raise interest rates at the beginning of 2007, the Organisation for Economic Cooperation and Development said in its twice-yearly economic outlook. The central bank's next policy review is on Jan. 30.

"Some signs of overheating have emerged: inflation has picked up to over 6 per cent, though food prices are in part responsible for this movement, and the current account moved into a deficit of 1.3 percent of GDP in fiscal year 2005 and is likely to widen somewhat in fiscal year 2006," the OECD said.

The OECD said the economy grew 8.5 per cent in 2005/06, and at an annual rate of close to 9 per cent in the April-June quarter.

"There is considerable momentum in the Indian economy at the moment that is likely to sustain growth into fiscal year 2007," the OECD said.

It expected growth in gross domestic product (GDP) to slow to 7 per cent in 2008/09, and inflation to moderate slightly to just above 5 per cent by then due to the current tightening in monetary growth.

The Reserve Bank of India has raised the key repurchase rate, at which it lends funds to banks, by 100 basis points to 7.25 percent this year. The reverse repo rate, at which it absorbs surplus funds, has been raised by 75 basis points to 6 percent in 2006.

The OECD said fiscal policy had become pro-cyclical -- that is, it was adding to growth -- in the first half of 2006/07 despite a law to progressively cut the budget deficit to 3 per cent of GDP by 2008/09.

"At this stage of the business cycle, the authorities need to avoid a pro-cyclical fiscal policy in which unexpected revenue gains are largely absorbed by increased government spending," it said.

The government aims to cut the deficit to 3.8 per cent of GDP this fiscal year from 4.1 per cent in 2005/06.

"Cyclical strength of revenues should result in the budget deficit falling below the targets set by the fiscal discipline law," OECD said.