Country Report India August 2008

Summary

By winning a crucial vote of confidence, the ruling Congress-led coalition, the United Progressive Alliance (UPA), will be better able to call the next general election, which must be held by May 2009, at a time of its own choosing.
Although the next government is likely to be a coalition led by Congress or the Bharatiya Janata Party (BJP), an alliance of regional parties headed by the leader of the Bahujan Samaj Party (BSP), Mayawati, is also a possibility.
Indias relations with Pakistan will continue to be fraught, although both countries will remain committed to continuing the peace process over the disputed region of Kashmir.
After several years of fiscal consolidation, the budget deficit will widen in 2008/09 (April-March) as the government grapples with its generous spending programmes amid a slowing economy.
The Reserve Bank of India (RBI, the central bank) will remain under pressure to raise interest rates further in 2008. In the absence of other policy options, the onus will remain squarely on monetary policy to tackle inflation.
Indias economic prospects will be damaged by higher borrowing and input costs and slower external demand growth. Real GDP growth is forecast to moderate from 9% in 2007/08 to 7.7% in 2008/09 and 7.1% in 2009/10.
Following the surge in inflation in the first half of 2008, the Economist Intelligence Unit forecasts that consumer price inflation will average 7.1% in 2008 and 6.2% in 2009.

The UPA coalition government won a crucial vote of confidence on July 22nd over the issue of nuclear co-operation with the US.
The vote of confidence has changed Indias political alliances ahead of the general election, with Congress in a new alliance with the Samajwadi Party, a regional party from the state of Uttar Pradesh.
The RBI intensified its battle against inflation on July 29th, raising its benchmark repurchase rate from 8.5% to 9%.
The wholesale price index (WPI) rose by 11.9% year on year in mid-July on the back of sharply higher food, oil and other commodity prices.
Fitch, an international rating agency, has downgraded Indias domestic credit outlook from stable to negative, citing a considerable deterioration of the central governments fiscal position.
Industrial production grew at the slowest pace for more than six years in May as spiralling prices prompted consumers to cut back spending.