BOMBAY, December 7: Political uncertainty, the prospect of higher interest rates and a weakening currency are hobbling India's economic takeoff, analysts said.

Economic growth was 6.8 per cent last year, the Reserve Bank of India expects 6.0 per cent this year, and analysts at foreign brokerages are saying 5.5 per cent and thinking even lower.

"I'm putting out new forecasts on Monday, and I'm revising growth for 1997/98 downwards," said one analyst.

Patchy signs of a recovery in sagging growth rate after a sharp deceleration in the latter half of 1996/97, began showing in July and there were hopes that by now it would be fully evident.

Those hopes are unfulfilled.

"Industry has been going through a slowdown and I don't expect the situation to get better till the second half of next year," said KK Nohria, managing director of electrical engineering firm Crompton Greaves.

Subodh Shah, chief ratings officer for Crisil said he saw economic growth in 1997-98 slipping to between 4.0-5.0 per cent with industry growing at a rate of 5.0-6.0 per cent.

Now the country faces three or four months of political void, administered by a caretaker government led by Prime Minister Inder Kumar Gujral, who resigned just over a week ago forcing the country into a mid-term poll.

"These three months are very vulnerable for the economy, mainly because investment is not picking up in either the public sector or the private sector," said SRK Rao, an independent economist and former principal advisor to the RBI.

Finance Minister P Chidambaram told a consumer electronics seminar in Mumbai on Saturday that people should not worry too much about the "rough patches" like the one manufacturing is going through at the moment.

Industrial output grew 6.4 per cent between April and July compared with 10.5 per cent in the same period last year. Chidambaram also said that "elections were one way of rediscovering confidence."

It is early days, but no one is confident that any of the parties or alliances will have a majority in the next parliament, which must be in place by March 15.

If that murkiness was not enough to contend with, the central bank has reluctantly raised short-term interest rates and removed liquidity from the money markets to protect the rupee, which fell to almost 40 to the dollar last Tuesday.

At his first press conference on November 22, the new RBI governor Bimal Jalan said he was worried by the slow pace of industrial growth.

At his second, on December 2, he explained why interest rates had to go up, but hoped they could come down again quickly once calm was restored to a currency market which has lopped 9 per cent off the rupee's dollar value in a little over three months.

Hiking the repo rate by two percentage points in a week to 6.5 per cent has brought the rupee back to around 39 to the dollar.

It is easy to make too much of the rupee's woes. Its decline comes after a year of stability against a dollar sitting on top of the currency world.

Even the RBI was willing its currency to weaken a few months ago, but then the Asian market trauma and the subsequent political drama made the market's move too fast for comfort.

The increased interest rates are meant only as a shock treatment and are just short-term, but for an economy desperate for demand and investment it looks like bad timing.

Asian currencies remain fragile and India's politics are in flux, making it difficult for the RBI to relax its guard. "We'll have to wait and watch," said Rao.

Crisil's Shah said he expected rates to move a little higher in the next few months.

"At this point in time I cannot see the RBI relaxing its control for another two or three months," Shah said.

That said, India is not a particularly interest rate-sensitive economy, but it is sensitive to political instability and government policy. "If a majority is in place it will resolve a lot of issues," Shah said.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.