Inflation pressure may rise in UAE on India’s slowdown

Dubai: The fallout of a slowing Indian economy, the UAE’s largest trading partner, may cause inflation concerns in the country’s near-term and could possibly impact its tourism revenue, according to an economic expert.

“India’s economy is slowing down due to high inflation. High commodity prices act as a tax on production profits and consumer spending. The UAE is going to face cost-push inflation because a lot of its consumer and intermediate production goods are imported [from India],” Dalton Garis, an Abu Dhabi-based economist, told Gulf News.

“Food prices are getting more and more expensive, leaving the middle class with less money for everything else,” he added.

Construction hit

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According to a Frost Sullivan analysis, the rising interest rates in India — around 11 interest rate hikes by the Reserve Bank of India in the last 18 months — are responsible for the construction industry being worst hit with a growth of a mere “1.2 per cent”.

“The slow growth rate has resulted in a huge disappointment, especially for business houses in the UAE that have exposure to the real estate industry in India,” Kirti Timmanagoudar, Director, Business Financial Services at Frost Sullivan, told Gulf News in an emailed statement.

She added that although growth in the manufacturing sector in India improved “from 5.5 per cent in the first quarter of 2011 to 7.2 per cent in the second quarter”, it is lower than second quarter 2010 growth rate of 12.7 per cent. “This slowdown in the manufacturing sector has brought down the overall gross domestic product (GDP) growth rate of India,” Timmanagoudar said.

However, one Dubai-based commodity analyst said there won’t be a major impact. “This economic slowdown in India is only a blip — India is still growing at a massive rate. The UAE’s trade with India will continue to be robust,” said Pradeep Unni, Senior Relationship Manager at Richcomm Global Services DMCC. India’s statistics bureau indicates that further sluggishness in the economy is looming in the wake of high inflation, a series of interest rate hikes and weak global conditions.

“We foresee challenges in the structural problems like delay in implementing power projects, ban on iron or mining, etc. as they continue to affect the economy,” said Frost Sullivan’s Timmanagoudar.

She added: “While we would like to believe that India is a high growth economy led by domestic consumption [unlike China], exports do form a significant part of its GDP. Slowdown of the western economies that are our biggest export markets has affected India and will continue to pull down GDP in the next two to three quarters.”

The Frost Sullivan analysis also says the quality of GDP growth has shown a positive impact on the economy, as Timmanagoudar pointed out. “The service sector has held up and grew at 10 per cent while the overall stock markets maintained the positive sentiment,” she said.

Largest partner

India is the UAE’s largest trading partner. According to the UAE Ministry of Foreign Trade, in 2010, imports from India were valued at $22.65 billion (Dh 83.17 billion), while the UAE’s exports to India were valued at $7.61 billion. India’s re-exports from the UAE were valued at $14.22 billion. India’s two-way non-oil trade with the UAE rose a whopping 53.45 per cent on year to $44.53 billion in India’s fiscal year that ended March 2009.