Country Report India September 2008

Outlook for 2008-09

• 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.
• India's relations with Pakistan will continue to be fraught, although both countries will remain committed to 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.
• India's 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 7.5% in 2008/09 and 6.8% in 2009/10.
• Following the surge in inflation in the first half of 2008, the Economist Intelligence Unit forecasts that wholesale price inflation will average 9.9% in 2008 and 7% in 2009.

Monthly review

• Violence erupted in the state of Jammu and Kashmir, as Muslims protested against the government's decision to transfer land to a Hindu shrine. After the government had reversed the decision, Hindus launched their own protests.
• The International Atomic Energy Agency approved the US-India civilian nuclear co-operation deal on August 1st. The agreement must now be approved by the Nuclear Suppliers Group.
• Bomb blasts hit Bangalore on July 25th and Ahmedabad on July 26th. In the wake of the terrorist attacks a renewed debate broke out about India's anti-terrorism laws, notably the Prevention of Terrorism Act.
• On August 14th the government approved a pay rise for civil servants that exceeded the recommendations of a government panel.
• Wholesale price inflation reached a 16-year high of 12.6% in early August. Food-price inflation continues unabated.
• Foreign direct investment inflows surged to US$10bn in the April-June quarter.

Source: Country Report