India forecasts strong growth for 2012

The Indian economy is expected to grow by as much as 9.25 per cent next year the country’s finance ministry said on Friday as it urgently strives to win back draining confidence among international investors.

India’s investment appeal has declined rapidly over the past three months as investors worry about a series of high profile corruption scandals, high inflation and the ability of the government to keep its fiscal deficit in check.

India’s economy is forecast to grow at 8.6 per cent in the year to the end of next month and prime minister Manmohan Singh nurses ambitions of pushing it higher to double digits to rival China. But, only days ahead of Monday’s national budget, investors are wary of any signs of a loss of momentum in India’s high growth rates as the country battles the highest inflation of any major Asian economy and capital flight from emerging markets.

In its annual Economic Survey, released on Friday, the finance ministry gave strong assurances that India could remain on its high growth trajectory, saying that economic growth would advance to a range of between 8.75 per cent and 9.25 per cent in the coming fiscal year.

It cautioned, however, about the threat of inflationary pressures from rising global commodity prices and a domestic consumption boom in India. Inflation is running at about 8.2 per cent in spite of pledges by Mr Singh to reduce it to below 6 per cent by the end of last year.

“The inflationary pressures on the domestic front are likely to be exacerbated by the higher levels of global commodity prices,” said the survey tabled by Pranab Mukherjee, the finance minister, in parliament.

Samiran Chakraborty, senior economist at Standard Chartered in Mumbai, said India was confronted by a “perfect storm” of inflation, a governance deficit and worries about financing its fiscal deficit.

“The big storm is the governance deficit,” he said. “But I don’t think what we have seen over the past three months can continue for another six months.”

“It’s a big question whether India will be able to finance its growth. It’s going to be a challenge when we are not going to get foreign money. There are fears that growth could go below 7 per cent.”

Mr Chakrabarty also said that foreign investors were concerned about issues surrounding the predictability of India’s business environment, particularly inconsistent tax treatments of their investments and unclear policy direction.”

In spite of a dramatic fall in investment growth, local industrialists expressed confidence that India’s troubles could be ridden out in the coming months in spite of the shadow cast by high crude prices on a nation dependent on imported oil.

“Right now we are definitely not the flavour of the month,” said Anand Mahindra, chief executive of Mahindra & Mahindra and a major Mumbai-based industrialist. “But that does not mean that we won’t be flavour of the year.”

Maintaining a high growth rate is crucial to absorb the millions of job seekers emerging from the Indian education system in a country where 70 per cent of the 1.2bn population is under the age of 35 years of age.

“India needs to see transformative growth in order to create adequate livelihoods for the population that is entering the workforce every year,” said Chanderjit Banerjee, the secretary-general of the Confederation of Indian Industry.

The Economic Survey also for the first time signalled the government’s possible approval of allowing large corporate houses to hold banking licences as the country tries to extend financial services across the country and into rural areas.

The Reserve Bank of India, the central bank, had been expected to issue guidelines on the issue of new banking licences by the end of last month.