India may see a further downturn in investment demand before it turns up and growth may moderate more than expected, while this year's total fiscal deficit could reach 10 percent, the Reserve Bank of India (RBI) governor said on Wednesday.
The RBI forecasts growth of 7 percent in the fiscal year which ends in March, a rate some analysts say is too optimistic because the March quarter may be worse than previous ones, Reserve Bank of India governor Duvvuri Subbarao said.
"So we still don't know. But the plain fact is that activity is slowing down ... Growth moderation, we believe, will be steeper than earlier suspected," he told a conference on a visit to Tokyo.
It was his first public appearance since the government unveiled an interim budget for the 2009/10 fiscal year on Monday, weeks ahead of a general election due by May.
The government projected spending may have to jump later this year to shield the economy from a global slump and stem job losses, fuelling fears of a spiralling fiscal deficit that is headed for a seven-year high.
It expects the central government fiscal deficit to rise to 6 percent of gross domestic product in fiscal 2008/09 from a previous target of 2.5 percent. That would be the highest fiscal deficit since 6.1 percent in 2001/02.
Subbarao said the combined deficit of the central and state governments could be much higher.
"This year 2008/09 the expectation is that the fiscal deficit, combined fiscal deficit of the centre and states, is going to be as much as 10 percent. So that is a concern," he said.
He was confident that India's recovery, when it came, would be "sharper and faster" than other economies but the country still had a painful adjustment to make.
"The challenge for the government of India and also the (Reserve) Bank of India is going to be to minimise the pain."
India's industrial output fell 2.0 percent in December from a year earlier, after a rise of 1.7 percent in November.
The Reserve Bank of India has already revised down its growth expectation for this fiscal year and slashed its key lending rate by 350 basis points since October to 5.5 percent.
The government expects expansion will be 7.1 percent this fiscal year, much slower than a pace of 9 percent or above in the previous three years and likely the slowest rate in six years.
Subbarao said there were positive features including a decline in inflation which would support consumption demand, reduce input costs for companies and give the government, which subsidies fuel prices, more fiscal room.
"Because of low commodity prices, I think imports will shrink faster than exports, so the current account deficit should be more modest than earlier feared," he said.
But he said investment demand was falling.
"Consumption demand is holding up, it's investment demand which is declining, and I would expect that we will see further downturn before we see an uptick," he said.
He gave no time frame for the uptick.
Wed Feb 18, 2009 2:35pm IST
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