Govt likely to take political plunge, hike diesel prices (Reuters)

在 ServiceModel 客户端配置部分中，找不到引用协定“TranslatorService.LanguageService”的默认终结点元素。这可能是因为未找到应用程序的配置文件，或者是因为客户端元素中找不到与此协定匹配的终结点元素。
在 ServiceModel 客户端配置部分中，找不到引用协定“TranslatorService.LanguageService”的默认终结点元素。这可能是因为未找到应用程序的配置文件，或者是因为客户端元素中找不到与此协定匹配的终结点元素。

NEW DELHI (Reuters) – The government was expected to raise diesel prices on Friday, although a delay in a government meeting to decide on the politically unpopular decision raised questions as to whether or not officials were in full agreement.

Oil prices fell 6 percent on Thursday after major consuming countries announced an emergency release of stocks, pushing benchmark Brent crude to a four-month low and providing a window for the government to raise prices with less pain for consumers.

Since it was first elected in 2004, the government of Prime Minister Manmohan Singh has more often than not refrained from pushing through tough reforms in favour of pleasing its predominantly rural voter base.

It has delayed a decision on increasing diesel and other fuel prices for months, even as its subsidy burden mounts.

Persistently high inflation, currently the highest among major Asian economies, as well as its handling of a spate of corruption scandals has added to the government's reluctance and led to what many critics say is a state of policy paralysis in New Delhi.

"We are working on more options, the final decision will be announced after the meeting," Oil Minister Jaipal Reddy told reporters, adding that the meeting had been rescheduled for 1900 local time (1330 GMT), a delay of 6 hours.

Sources familiar with the matter had said a price rise was likely. The government could also cut taxes and Reddy said more options were being considered.

Reddy told Reuters earlier on Friday the International Energy Agency's (IEA's) planned release of strategic stockpiles would give only temporary respite.

"I cannot speculate on the future trend but in the short run there is no hope. Even if there is a slight increase in production those gains will not be made available to us because of unbridled speculation in the financial markets," he said.

"We don't know whether this (softening in global prices) is a stable trend," he added.

J.P. Morgan cut its forecast for benchmark Brent oil for the third quarter to $100 a barrel from $130 after the IEA move but on Friday global crude prices were already rebounding.

Half of India's population are farmers, but the government needs to cut its massive subsidy bill on cooking gas and diesel in order meet its budget targets.

A year ago, New Delhi freed up petrol prices, which have risen about 23 percent since then, and said it could do the same with diesel. International oil prices are about 39 percent higher over the same period.

For a graphic on India fuel prices vs crude, click http://link.reuters.com/xyv32s

For a graphic on oil prices and IEA stock releases, click http://link.reuters.com/jev32s

PRICE RISES COULD ADD TO INFLATIONARY PRESSURES

With inflation above 9 percent and the domestic fuel price index up nearly 13 percent on the year, a fractious coalition government is wary of alienating its core voter base among India's 500 million poor, who live on less than the cost of 2 litres of diesel a day.

State-run fuel retailers Indian Oil Corp, Bharat Petroleum Corp and Hindustan Petroleum Corp are losing 4.56 billion rupees ($101.4 million) a day on sales of diesel, kerosene and cooking gas at state-set cheaper prices.

"Obviously diesel and LPG (liquefied petroleum gas), which is being considered, will add to inflation, diesel particularly a bit more as compared to petrol and LPG because of transport costs," said Saugata Bhattacharya, an economist at Axis Bank in Mumbai.

A three rupee increase in the price of diesel from current levels of 38 rupees ($0.845) per litre would add 40-45 basis points to wholesale price inflation, according to Yes Bank, which expects annual headline inflation to top 10 percent in August, based in part on expected fuel price hikes.

Shares in Bharat Petroleum and Hindustan Petroleum were up 2.84 percent and 4.35 percent respectively on Friday, outperforming the broader market.

($1 = 44.955 Indian Rupees)

(Additional reporting by Shamik Paul in Mumbai; Editing by Tony Munroe)

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ANALYSIS - Indian slowdown, high inflation likely to persist (Reuters)

在 ServiceModel 客户端配置部分中，找不到引用协定“TranslatorService.LanguageService”的默认终结点元素。这可能是因为未找到应用程序的配置文件，或者是因为客户端元素中找不到与此协定匹配的终结点元素。
在 ServiceModel 客户端配置部分中，找不到引用协定“TranslatorService.LanguageService”的默认终结点元素。这可能是因为未找到应用程序的配置文件，或者是因为客户端元素中找不到与此协定匹配的终结点元素。

NEW DELHI (Reuters) – India's growth story, which has excited many in recent years, is passing through a not-very-happy chapter that might last well into 2012.

While India should keep growing at rates many nations would envy, Asia's third-largest economy faces a period of reduced growth and stubbornly high inflation.

This is causing confidence in the growth story to wane while worries rise. Indian stocks, hit by inflation and high interest rates, are Asia's worst performers this year-- down nearly 14 percent -- resulting in a decline in portfolio flows. Weaker tax revenue can widen a yawning fiscal deficit.

Also, there's a possibility that India could lose out to China and smaller Asian economies in the battle to attract big foreign investment. China has cooled as it, too, battles inflation, but still might grow 10 percent this year.

Several years ago, annual Indian growth was about 9.5 percent. Then it fell to 6.8 percent during the global financial crisis but recovered to 8.5 percent in the last fiscal year, which ended March 31.

For the current fiscal year, private economists are slashing growth forecasts to below 8 percent and notching up inflation projections. In May, annual inflation was 9.06 percent -- compared with 5.5 percent in China.

For a GRAPHIC, click http://graphics.thomsonreuters.com/11/05/IN_GDP0511_CC.gif

UNAVOIDABLE RESULT

Lower growth is an unavoidable result of the Reserve Bank of India's fight against inflation, which has featured 10 increases in interest rates since March 2010.

"It's going to be a difficult year," said Vishnu Varathan of Capital Economics.

Growth is likely to be less than 8 percent and will not pick up rapidly "especially with policy having to choose between price stability and growth," he said.

The government was hoping growth in gross domestic product, which was 8.5 percent in the year ended March 2011, could remain as high -- but it cannot, given the battle against inflation and other factors including weak political leadership.

Credit Suisse forecasts growth will be just 7.5 percent this fiscal year and the following one.

"We are only at the early stages of seeing the impact of the monetary tightening, the negative effects of which are likely to persist well into 2012/13," it said in a note this month.

In its latest move, the central bank on June 16 raised to 7.5 percent the rate at which it lends to banks.

Even after 10 increases, India's real interest rates remain negative, meaning the inflation pace remains above rates. That can drive consumption at a time the government is not succeeding in boosting supply, so inflation can be further fuelled, resulting in further tightening and economic pain.

"Inflation is entrenched in India, and now mostly reflects demand side pressures," said Frederic Neumann, managing director and co-head of Asian economics research at HSBC.

A slowing economy cuts tax revenue, widening the fiscal deficit. High oil prices have cut demand, swelled import bills and raised costs at corporates. Meantime, the global picture looks discouraging, clouding the outlook for exports -- which have been a bright spot.

India escaped the worst of the 2008 global downturn due to robust internal demand and high government spending. A large middle class flush with cash spent on everything from gold to cars, and factory capacity got pushed to limits. But then firms dithered on adding capacity, thanks to weak global recovery and domestic policy uncertainty amid a slew of corruption scandals.

Price pressures were emerging too. New Delhi's easy fiscal policy to cope with the global slowdown was not rolled back quickly enough and the central bank was widely seen as behind the curve. Drought in 2009 made caused food prices to spike.

But no one expected the level of India's slowdown in the January-March quarter. For the first time in five quarters, annual growth was below 8 percent. Growth in private investment slumped to 0.4 percent from 7.8 percent a quarter earlier, while annual gains in consumption demand slowed to 8 percent from 8.6 percent.

SLOW, SLOW, SLOW THE BOAT

Industrial output has risen in single digits the past six months. Car sales, a barometer of consumer demand, have slowed with May's total rising the least in two years. Manufacturing data show that firms' input costs have been rising faster than output costs since December.

"It looks like the manufacturing sector is going to see very subdued single digit growth. Continued interest rate hikes are going to hamper sustained high growth in consumer durables," said Varathan of Capital Economics.

"Robust growth in export is the only positive factor for manufacturing sector. But that will help only selective industries."

Exports posted record growth in the year ended in March. India exported $245.9 billion of goods during the year, far above the government's target of $200 billion.

A slowdown is evident in services, which account for about 58 percent of the economy. The sector has slipped twice in the last three months, with May's expansion being the slowest in 20 months.

The sector is grappling with higher costs. Aon Hewitt estimates Indian companies will have to pay 13 percent more to employees in 2011.

"Slowing manufacturing activity, rising input costs, tight liquidity, interest rate pressure and a government looking to tighten its fiscal belt don't make a very rosy outlook for the services sector," said Siddhartha Sanyal, an economist with Barclays Capital in Mumbai. He expects GDP growth of 7.7 percent in 2011/12.

NO SPENDING BOOST

The farm sector is expected to defy the slowdown on the forecast of a normal monsoon. It grew 6.6 percent in 2010/11, compared with 0.4 percent a year earlier.

A good harvest should help shore up rural demand, which should save the economy from any severe slowdown. But to what extent higher rural income can offset a slowdown in consumer spending is unclear.

The government is looking to keep a lid on spending to meet its fiscal deficit target of 4.6 percent for this fiscal year.

Policy inertia in the wake of graft scandals is not helping the economy. The government is repeatedly deferring decisions on raising prices of diesel, kerosene and cooking gas, even as high global prices threaten its fiscal gap target.

Lack of policy as well as regulatory hurdles have held up investment in infrastructure and retail sectors. In 2010/11, India received 25 percent less foreign direct investment than the previous year.

"The near-term economic outlook will continue to be affected by the lack of positive policy activism on reforms, paralysis in decision-making, and ongoing fear about the unfolding corruption issues and investigations that have affected business confidence," said Rajeev Malik of CLSA.

(Editing by Richard Borsuk)

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