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Oil prices brake the boom in India

BANGALORE, India After last year's spectacular performance, India's economic growth is being jeopardized by the double impact of rising global oil prices and a faltering monsoon.

As global oil prices have risen well into the $40 per barrel range, experts have trimmed forecasts and predicted that economic growth will decelerate. A $5 per barrel rise in average crude prices could shave off as much as 0.25 percent from India's economic output, some analysts have estimated. Global oil prices have risen by more than $5 since the beginning of July.

India imports about three-quarters of its crude oil requirement of 2.2 million barrels a day. In the last quarter, India imported $6.6 billion worth of crude, amounting to a third of the total value of all of its imports.

In the fiscal year ending in March 2004, India's economic output swelled 8.2 percent, a rate second only to that of China, and the fastest for India in a decade and a half.

Since then, however, economists have swiftly revised growth forecasts downward as rising oil prices and a weaker-than-expected monsoon raised concerns.

"Oil prices have gone through the roof, and that is adversely impacting the economy and industry," said D.D. Rathi, chief financial officer of Grasim Industries, a cement producer.

Grasim Industries is the flagship company of Aditya Birla Group, a leading Indian industrial conglomerate.

Rathi said rising oil prices were affecting profit margins at Grasim, which also manufactures fiber, textiles and chemicals. "It is starting to pinch," he said.

Nobody quite saw such a price increase coming, Rathi said. "On the contrary, even at $32 a barrel levels, we thought it would slide back to the $26 levels."

Rising oil prices invariably spur higher inflation rates, lower private consumption and lower growth for India.

"If global crude oil prices move up by $5 a barrel for the full year, then India's inflation rates rise by 0.5 percent to 0.6 percent and GDP rates fall by 0.25 percent," said Chetan Ahya, India economist and senior vice president at JM Morgan Stanley in Mumbai.

But Ahya said India's sensitivity to global oil prices was moderate when compared with some other countries. India meets 30 percent of its commercial energy requirements through oil.

The weather may be more of a concern. India's meteorologists first forecast lower-than-normal rainfall for this year, but recently revised that after heavy rainfall caused flooding in many parts of western and eastern India.

"Predicting the rainfall situation and its impact on the economy is worse than gambling," Ahya said.

Nearly two-thirds of the country's population of one billion lives on farm income, so India's economy is highly dependent on ample rainfall. Last month, JM Morgan Stanley revised its forecast for growth this year to 5.6 percent from 6.4 percent after deficient rains.

Ahya said the outlook for the monsoon season did not look healthy. "It does not appear to be a normal revival, and we are inclined to keep the forecast at 5.6 percent," he said.

Mahesh Vyas, chief executive of the Center for Monitoring of the Indian Economy, an independent research group based in Mumbai, said Indian companies would probably absorb the oil price increase rather than pass it to consumers.

"Indian companies will take in a large part of the oil price hike as many of their other costs such as interest costs are declining," Vyas said. "With rising oil prices and a worrying monsoon, we will possibly reduce our gross domestic product forecast from 6.3 percent to 6 percent."

In the past, rising crude oil prices have hurt the rupee, forcing the central bank to increase short-term interest rates. But economists say that recent high levels of investment capital coming into the country should help the central bank maintain a soft monetary policy.

The New York Times

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