TANMAY OBSERVES!

INDIA GROWTH EXPECTED TO RECOVER TO 7.3% - S&P

India's real economic growth will slow to 6% in 2009 from an annual average expansion of 8% in the last five years, but the lagged effects of fiscal and monetary steps will likely help boost the economy from July Standard & Poor's said Friday.

"Assuming that the global economic crisis does not worsen, India's ongoing monetary and fiscal stimulus packages, as well as a collapse in commodity prices, are setting the stage for a pickup in the second-half of 2009," the ratings agency said in a report.

The country's domestic demand, although slowing, and high savings rate will continue to play a key role in funding economic activity, S&P said.

S&P forecasts India's economic growth will recover to 7.3% in 2010.

Although the government is left with little room to pump prime the economy, the central bank is expected to continue its easy monetary stance as inflation eases and industrial output growth slumps.

The inflation rate, measured by the wholesale price index, decelerated to 2.43% in the week ended Feb. 28, from 3.03% a week earlier, sharply lower than the over 13-year high of 12.9% in August.

"Despite the reversal in interest rates, the growing economic uncertainty, coupled with rising risk aversion among banks, should, in our view, continue to exacerbate the downward pressure on industrial output in future," S&P said. India's January industrial output growth shrank 0.5%, after contracting 0.6% in December.

Since October, the Reserve Bank of India has lowered the repurchase rate by 400 basis points and the cash reserve ratio by an equal amount. The reverse repurchase rate has been lowered by 250 basis points over the same period.

The federal government has cut factory levies by as much as 600 basis points since December to boost economic activity, committed an additional expenditure of INR200 billion and allowed overseas investors to buy more corporate bonds as part of its stimulus packages.

But this has strained government finances, which are already under pressure from large scale spending ahead of federal polls that start next month.

India's budgeted fiscal deficit will more than double to 6% in the current fiscal year, which earlier prompted S&P cut its long-term sovereign credit rating outlook to negative on India's BBB- long-term and A-3 short-term ratings.

It has also warned that it may cut Asia's third largest economy's rating to junk as the nation's fiscal position may be unsustainable in the medium term.