Country Report India June 2008

Outlook for 2008-09

• The poor state election results for the Indian National Congress party suggest that the minority coalition government that it leads at the federal level is unlikely to call a general election before the end of its term in May 2009.
• The next general election will return another coalition government. The landmark victory of the Bharatiya Janata Party (BJP) in the state election in Karnataka will boost its prospects for a strong showing at the national level.
• The government's target for the federal budget deficit in fiscal year 2008/09 (April-March) is 2.5% of GDP, but its expansionary spending commitments and public-sector wage awards will push up the deficit to 3.2% of GDP.
• The acceleration in inflation will force the Reserve Bank of India (RBI, the central bank) to tighten monetary policy during 2008, with interest-rate cuts postponed to 2009 despite the extreme monetary loosening in the US.
• Consumer price inflation is now forecast to average 6.9% (previously 6%) in 2008 and 5.9% (previously 5.7%) in 2009.
• Economic growth in India will slow to 7.6% in 2008/09 from 9% in 2007/08, but this moderation will be driven primarily by domestic rather than external factors.

Monthly review

• The BJP won an important victory in the Karnataka state election on May 10th. The party will form a state government in the south of the country for the first time, owing to support from independent legislators.
• A terrorist attack in Jaipur killed around 80 people on May 14th. A relatively unknown Islamic militant group calling itself Indian Mujahideen claimed responsibility for the attack.
• Iran’s president, Mahmoud Ahmadinejad, visited India in April to push for the mooted Iran-Pakistan-India gas pipeline. The plan is testing India's goal of remaining allies with both Iran and the US, which opposes the project.
• Real GDP growth was 9% in 2007/08, according to data released by the Central Statistical Organisation on May 30th. The figure was higher then the advance estimate released in February.
• Industrial production growth slowed to 3% year on year in March—the slowest pace in six years. Industrial production growth averaged 8.1% in 2007/08, down from 11.6% in 2006/07.
• The rupee's appreciation against the US dollar has come to a temporary halt on account of investors' concerns about rising inflation, moderating capital inflows, weakening industrial activity and a rising current-account deficit.