Warning from Standard and Poor

High inflation can derail India's growth, warns S&P

NEW DELHI: A day after the Reserve Bank expressed concern over rising inflation, global credit ratings agency S&P warned today that the high rate of price rise could derail India's growth.

"High inflation could derail India's stable macroeconomic and interest rate environment", Standard & Poor's said in a statement.

The agency, however, retained India's long-term rating outlook at 'stable', citing strong external position and positive investment trends.

"The ratings on India reflect the country's good economic growth prospects and its fairly strong external position," S&P said, adding that positive investments in the form of foreign direct investments and portfolio capital further strengthen the ratings.

The report said that even as the government follows the path of fiscal consolidation, rising oil prices could lead to slippages.

Food inflation was 9.5 per cent for the week ended March 19. The overall inflation in February was 8.31 per cent.

"Although the government has started to tackle the problem of inflated subsidies, these remain high and prone to the volatility in global commodity prices, especially that of fuel," S&P said.

It said high fiscal deficit and debt burden remain the most significant negative rating factor.

"The country's weak fiscal profile and structural problems temper its strengths. Structural problems not only constrain efficiency but also preclude a large share of the population from benefiting from the country's rising prosperity," S&P added.

It said India remains vulnerable to international commodity prices and the monsoon. These two factors have led to a substantial increase in inflationary pressure.

The Reserve Bank has already hiked key policy rates eight times since March 2010 to tame inflation.

S&P said the rise in the food prices also represents structural changes, such as India's growing middle class and the resulting shifts in diet patterns.

"Despite the government's effort to address the logistical bottlenecks in the distribution system, it could take time to control inflation," S&P added.

S&P said India's ratings could be revised upwards if the government deficits are reduced significantly. Conversely, loose fiscal policy that may lower India's medium-term growth prospects could result in a downward pressure on the ratings.

Rising inflation may affect India's growth: Deloitte

Rising prices of crude oil, food items and poor industrial growth are the biggest threat to India's nine percent growth target, according to a study by global consultancy firm Deloitte released on Wednesday.

"Consistently high inflation related to food and crude oil prices, and poor industrial growth threatens to derail the government's plan of achieving about nine percent growth in the next fiscal," said Deloitte's Asia Pacific Economic Outlook report.

"India's worries are still as real as they were before the budget," it added.

The report said that though food inflation cooled off in the recent months, prices still remained higher than they were a year ago.

According to the latest data from the ministry of commerce and industry, food inflation for the week ended March 19 declined marginally by one percent to 9.5 percent as prices of vegetables, milk and other essential food items eased a bit.

The global advisory firm said that the rising price of crude oil and the government's inability to pass on the increased cost to the customers is another major cause of concern.

According to the report, while petrol has been fully de-regulated and the prices have been increasing in the last few months, diesel prices remain artificially low as it is decided by a group of ministers. Diesel is reportedly selling at almost Rs.10 below the estimated price.

On the slowed growth in the industrial sector, the report said rising labour and raw material costs do not gel with the future outputs.

The report said the industrial growth slowed down to a 20-month low in December due to a sharp contraction in the capital goods sector.

According to the latest official data, even though the index of industrial production rose 3.7 percent in January from a year before, the growth in capital goods remained a concern as manufacturing sector seemed to be lagging.

The report, which also talks about the economic outlook in China, Indonesia and Singapore, said declining Chinese trade surplus would eventually result in interest rates going up in one of the fastest growing economies.

Indonesia is expected to achieve higher growth in 2011 compared to 2010. While the country faces steep challenges in the form of inflation and poor infrastructure, domestic consumption is expected to remain strong and investment is likely to pick up.

Singapore's tourism industry is likely to emerge as the driver of growth. A rebound in domestic demand helped support the country's recovery, but inflation poses a major risk to the exuberance of the Singaporean consumer.