High inflation and weak global growth may pull down India's GDP to around 6.7 percent in 2012. "In India, high inflation and interest rates, combined with weak global growth, will pose a risk to the country's ability to sustain growth momentum in 2012 (calender year)," says a report by the private banking department of RBS.
The report also said that investment activity would continue to remain weak due to a high interest rate regime coupled with negative business sentiment. Referring to urban and rural spending, it said that while urban spending would come down due to inflationary pressures, rural consumption would grow in the current year. The report also pointed out fiscal situation is unlikely to change in the current year as passing of fuel subsidies would be difficult.
"Fiscal policy remains expansionary with a focus on 'inclusive growth led' social sector spending and delays in adopting tax reforms. The fiscal situation is unlikely to improve in the next fiscal year as the pass through of fuel subsidies will be difficult. Further, a new Food Security Bill could double the FY13 food subsidy," says the report.
The inflation would be around seven percent in the first half of 2012, which will delay the monetary policy easing until the second half. Referring to the policy rate action by the Reserve Bank of India, the report said that the central bank is likely to cut rates by 100 basis points in the second half of 2012. The report also suggested that the rupee would continue to remain volatile in 2012 and that it remains cautious about the prospects of Indian equity in the current year.