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'High fiscal deficit, biggest risk to India'

March 18, 2009 19:04 IST
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The Indian rupee is likely to fall further, but its depreciation will not be of the kind witnessed by Asian currencies during the 1997-98 crisis. The colossal fiscal deficit is the biggest downside risk to the country and not the Taliban in Pakistan. India will clock a GDP growth rate of 6 per cent during this fiscal year and only 5 per cent in 2009-10.

These are some of the forecasts made by Anjalika Bardalai, senior editor/economist, Economist Intelligence Unit. She spoke on a range of economic and political issues with Senior Associate Editor Prasanna D Zore on the sidelines of an economists' conference organised by the Economist Intelligence Unit.

What's your forecast for India's GDP growth for 2008-09 and 2009-10?

We are estimating GDP growth at 6 per cent for fiscal year 2008-09 and for the fiscal year ending March 31, 2010 we are estimating a growth of 5 per cent.

Is India heading towards deflation given the rate at which inflation rate is climbing down?

It is possible, but we are not expecting it as an annual average. Because the inflation rate was so high in the middle of 2008, if we do the year-on-year comparison in the middle of 2009, you might see a slight threat of deflation but we really don't see that happening in India.

Given that 2009 is an election year the government is back to fiscal profligacy. How serious a threat can high fiscal deficits have on India's growth rate?

Fiscal deficit is probably the biggest downside risk that we see to the Indian economy.

At what point of fiscal deficit will it affect GDP growth?

It is difficult to quantify but we are quite alarmed by the fact that we expect the fiscal deficit to be a very high percentage of India's GDP.

The basic issue to be answered here will be how you fund this deficit. India is obviously no stranger to fiscal crisis. So nobody wants to see a repeat of what happened in the 90s. But it is a risk.

Do you see a meltdown of Indian currency if it falls below 55 to the US dollar?

I wouldn't say meltdown, no. Obviously, we do expect further depreciation but we are not forecasting a meltdown.

What are the chances of BJP led NDA coming to power?

It is said that the only thing certain about Indian politics is nothing is certain. This election (to the 15th Lok Sabha) is absolutely wide open. Anything can happen and the mood can change even a week before the election.

Our core forecast is that Congress has a slightly better chance to form the next coalition government at the centre.

What gives Congress that slight edge over BJP?

It is two things basically. Were these elections held in 2008 the Bharatiya Janata Party would have been an absolute winner. The whole anti-incumbency factor, inflation rate very high, economic growth showing signs of slowdown and the Congress was really looking down then. BJP would have easily reaped the advantage then.

Now in this critical period of a few weeks prior to the polls, there is a lot of good news for the Congress, especially on the inflation front.

As a senior editor/economist at the Economist Intelligence Unit you are looking after the company's political and economic analysis and forecasting for India and Pakistan. Where do you think is Pakistan, as a nation-state, headed?

Obviously, things are changing in Pakistan by the day. Recently, President Zardari seems to have backed down in his fight against Nawaz Sharif. What I can tell you about Pakistan in the short term is that the conflagration between these two lead players will be resolved but there will be huge instability in Pakistan. But in the medium term it is certainly going to weaken Zardari and his Pakistan People's Party. And like it or not they are leading the government currently.

But in the medium term we don't see any great threat and things will settle down in Pakistan in about six months.

Do you see the Army back in Pakistan?

Only as a very, very, very last resort. General Kayani has made it clear that he does not want to bring the Army back into politics. Everybody knows that the United States, which is very influential, does not want Army back into politics. So Army staging a comeback will be the last choice. But if all else fails it could be a possibility.

Are you worried that the gradual Talibanisation of Pakistan will spook foreign investors in the sub-continent and especially in India given the relationship between the two nuclear-powered nations?

We are not really expecting that. I think the India-Pak hyphenation does not matter much for the global investor community. Speaking to client companies in the United Kigdom I don't get the sense at all that what is happening in Pakistan is going to affect India.

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