India's GDP Outlook Just Got Slashed Because Of The Country's Out Of Control Inflation Problem

Indian protest

Photo: AP

Fitch has cut India’s FY12 GDP forecast to 8.3% from an earlier 8.5%, because of high inflationary pressures, according to The Times of India.The ratings agency also raised its inflation forecast to 7% in FY12. Food inflation reached 10.05% in March, before easing to 9.5% in the week ending March 19. The biggest worry however has been the spread from food and energy to core inflation

Fitch expects more tightening measures from India’s central bank to deal with rising inflation.

India’s largely poor rural population spends 67% of its income on food and rising costs have wiped out  gains in real wages. The drastic rise in prices over the last 12 months has also hurt middle income households that slashed their spending on entertainment, shopping and eating out by 65%, according to The Associated Chambers of Commerce and Industry (ASSOCHAM). 49.5% of that group restricted their expenses to just necessities.

Officials hope that a good winter harvest will drive down prices. But rising costs are likely to hurt Prime Minister Manmohan Singh’s Congress party in assembly elections that began Monday.

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