High inflation hurting investment - Mukherjee
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Inflation is expected to remain high until end-December and is impacting private investment, while lingering concerns over the euro zone sovereign debt woes are clouding the outlook for its exports, the finance minister said on Wednesday.
Annual headline inflation accelerated to 9.44 per cent in June, driven by higher prices of manufactured goods and fuel, adding pressure on the Reserve Bank to raise rates next week despite signs of slowing growth in Asia's third-largest economy.
"Headline WPI monthly inflation will likely remain relatively sticky and persistently high between August-December 2011 and start to fall thereafter," Pranab Mukherjee said in a statement issued to a select group of newspaper reporters, seen by Reuters.
The RBI has raised rates 10 times since March 2010, ranking it among the most aggressive central bank in the world, and is expected to raise rates again by 25 basis points at its quarterly review on July 26.
Still, India's inflation rate remains far higher than in many other big emerging economies.
"We expect that the headline WPI inflation should moderate to six to seven per cent by March 2012," Mukherjee said.
High inflation is pushing up the cost of credit for firms as well as escalating their input costs by inflating their spending on raw materials and wages.
Aon Hewitt estimates Indian companies will have to pay 13 per cent more to employees in 2011.
Growth in private investment slumped to 0.4 per cent in the quarter through March from 7.8 per cent in the previous quarter, with analysts predicting any upturn unlikely before price pressures moderate.
"Corporate investment is moderating ... capex of the corporate is led by profit cycle, which was affected somewhat by cost escalation of input," Mukherjee said.
"With a pick up in foreign direct investment (FDI) happening, there is every reason to maintain the investment-to-GDP ratio stable or higher than the 2009/10 levels."
In 2010/11, India received 25 per cent less foreign direct investment than the previous year, but in April-May, the first two months of the current fiscal year, inflows were up an annual 77 per cent at about $7.8 billion.
Euro zone worries
While high inflation and rising interest rates are crimping domestic demand and slowing down the economy, worries over the euro zone sovereign debt crisis is likely to weigh on Indian exports -- which have been a bright spot.
Indian exports to the European Union is estimated to have grown 20.5 per cent to $31.5 billion during April-December 2010 from a year earlier, the latest estimate from the trade ministry showed.
The European Union accounts for nearly 19 per cent of India's total exports.
India's exports in June rose an annual 46.4 percent to $29.2 billion, after posting a record 37.6 per cent growth in the 2010/11 fiscal year.
However, Mukherjee cautioned this trend may not continue.
"On the external front there has been a surge in demand for exports from emerging markets and developed countries, of late. This may not be sustained on account of the euro area and slowdown in global trade volumes and the effects of commodity prices."
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