Inflation fight may keep GDP growth around 8.5 pct - Pranab

HANOI Wed May 4, 2011 6:38pm IST

France's Finance and Economy Minister Christine Lagarde (R) chats with India's Finance Minister Pranab Mukherjee while attending a governor seminar session ''Asia 2050: Pursuit of growth, sustainability and well being'' during the 44th annual meeting of ADB in Hanoi May 4, 2011. REUTERS/Nguyen Huy Kham

France's Finance and Economy Minister Christine Lagarde (R) chats with India's Finance Minister Pranab Mukherjee while attending a governor seminar session ''Asia 2050: Pursuit of growth, sustainability and well being'' during the 44th annual meeting of ADB in Hanoi May 4, 2011.

Credit: Reuters/Nguyen Huy Kham

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HANOI (Reuters) - India's fight against inflation could knock about half a percentage point off economic growth in Asia's third-largest economy this fiscal year, Finance Minister Pranab Mukherjee said on Wednesday, a day after the Reserve Bank of India (RBI) raised rates.

"It may be around... 8.5 percent. So, it will be about half a percent," he told Reuters when asked about the impact of stubbornly high inflation on gross domestic product growth.

The RBI stepped up its fight against rising prices on Tuesday, raising interest rates by a bigger-than-expected 50 basis points and vowing to battle price pressures even at the cost of some economic growth.

The government had been expecting economic growth this year of 8.75 percent to 9.25 percent, Mukherjee said.

India is not alone in facing up to the reality that GDP growth is likely to be dented in the battle against inflationary pressures that have been building in Asia as the region leads the global recovery.

Vietnam, which has the highest inflation among the main Asian economies, signalled on Tuesday that the government had lowered its expectations for economic growth because it was focusing on reining in prices.

Mukherjee, in Hanoi for the Asian Development Bank's annual meeting, said it was too early to tell if further measures would be needed to check inflation.

"We have already taken steps. I do hope it will have its impact," he said. More tightening may be taken "if it is needed", he said, adding "I can't predict right now."

The RBI has been among the most aggressive central banks anywhere with nine rate rises since March 2010, but its gradual policy tightening has failed to cool inflation initially driven by high food and fuel prices, and more recently by demand pressures.

Slower economic growth would be another political headache for Prime Minister Manmohan Singh. His government is counting on growth of 9 percent to help fund increased social spending and keep the fiscal deficit in check.

The target is in excess of most private forecasts and the central bank's expectation for growth of about 8 percent, which assumes a normal summer monsoon and global crude oil prices of $110 a barrel.

The economy grew by an estimated 8.6 percent in the fiscal year that ended in March 2011.

Much of India's stubbornly high inflation is blamed on supply bottlenecks, including in food output, which are beyond the scope of monetary policy.

(Editing by John Mair)

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