Wednesday 26 March 2008

India's Growth May Be Hurt by Global Slowdown, Chidambaram Says

India's ability to sustain record growth may be constrained by a slowdown in the world economy, Finance Minister Palaniappan Chidambaram said.

``We are deeply concerned about global developments,'' Chidambaram said in a speech at the Lee Kuan Yew School of Public Policy in Singapore today. ``When stories of a growth slowdown do the rounds, investors prefer to wait and watch.''

Citigroup Inc. yesterday reduced its growth forecast for India on concern an expected recession in the U.S. will hurt exports and investments. Chidambaram said high growth was an ``imperative'' for the South Asian nation to boost its tax revenue and fund health, education and road programs.

``As far as India is concerned, growth is not an end in itself,'' Chidambaram said. ``Growth is the means to achieve the objectives that we desire. Among these are free and compulsory education for children, improvement of nutrition and adequate infrastructure including roads and connectivity.''

India's $906 billion economy, Asia's third-biggest, has expanded an average 8.7 percent since 2003, the fastest pace since independence in 1947. That's helped increase the ratio of tax to gross domestic product to 12.5 percent in the year ending March 31 from 9.2 percent in 2003, Chidambaram said.

``An increase of one-half percent may appear small, but in real terms this will give us additional revenues of nearly $25 billion,'' Chidambaram said. ``It is high growth in the last four years that has given us the capacity to provide large sums of money for health, education, drinking water and roads.''

Reducing Poverty

India needs to spend more on health and education because more than half its 1.1 billion people live on less than $2 a day, according to the World Bank. Further, congestion on roads, ports and inadequate power supply shave 2 percentage points off the nation's GDP each year, the finance ministry estimates.

Citigroup cut India's growth forecast to 7.7 percent in 2008 from an earlier estimate of 8.3 percent, as it reduced estimates for Asia due to the impact of a recession in the U.S.

U.S. growth slowed to 2.5 percent in the fourth quarter from a year earlier and half of the economists in a Bloomberg News survey this month expect a recession this year.

The U.S. Federal Reserve has lowered its benchmark lending rate six times since September to cushion consumers and companies from the worst of a credit crunch that's made some of the world's biggest banks reluctant to lend to each other. Financial companies have posted at least $195 billion in writedowns and credit losses tied to U.S. mortgage markets.

``The subprime mortgage market crisis that seems to have triggered the current turbulence is solely due to poor regulations and lax supervision,'' Chidambaram said. ``If this had happened in developing countries, we would have been lectured on the virtues of bankruptcy.''