India’s GDP growth likely stuck near three-year low

Saturday, 1 December 2012 00:00 -     - {{hitsCtrl.values.hits}}

Reuters: India’s economic growth likely hovered near a three-year low in the last quarter, underscoring the urgency of implementing politically difficult reforms to spur a revival in Asia’s third largest economy.

Finance Minister P. Chidambaram said last week that growth was about 5.5 per cent in the three months to the end of September, warning that India faced a ‘a difficult situation’ and needed innovation to boost output.

The Government will release Gross Domestic Product (GDP) data for the quarter at around 11:00 a.m. on Friday.

“We believe that this will be the bottom of the growth cycle and going forward there would be a very, very small pace of recovery,” said chief economist at the Bank of Baroda Rupa Rege Nitsure.

“It’s not going to be a sharp or an impressive recovery, it’s going to be a mild recovery. For the year as a whole, we would still look at sub 6 per cent growth.”

A growth rate below 6 per cent for the third quarter in a row is damaging for a country that aspires to near double-digit expansion to provide jobs for its burgeoning population.

The slump makes it tougher for Prime Minister Manmohan Singh to fund flagship welfare programmes ahead of a national election due in mid-2014.

Chidambaram told Reuters earlier this month that economic growth for the current financial year that ends in March could be as low as 5.5 per cent, which would be the worst in a decade. The slowing economy has already buffeted Government revenues, leaving New Delhi scrambling for ways to balance the budget and avert a credit rating downgrade threatened by ratings agencies Standard and Poor’s and Fitch. The slump prodded Prime Minister Singh into shedding years of policy inertia to launch some of the most daring initiatives of his tenure in September, including raising subsidised diesel prices and opening sectors like supermarkets to foreign players.

But analysts say India needs to take more steps quickly, including speeding up approval for infrastructure projects, overhauling the tax system and reducing its swollen deficit to revive capital investment. “A sustainable turnaround in India’s growth prospects would require considerable effort, well beyond the burst of measures seen in September,” Deutsche Bank said in a recent note.

Appetite for reform

Singh is currently fighting to defend the reforms in Parliament, where a non-binding vote on the supermarket policy will be held in the winter session just started.

The outcome of the vote may test the minority Government’s appetite for further reforms ahead of a string of state elections starting in December.

A Reuters poll of 39 economists forecast that GDP rose 5.4 per cent year-on-year in the July-September period, a whisker below the previous quarter’s 5.5 per cent and close to the three-year low of 5.3 per cent growth in the January-March period.

Many G20 central banks have been moving to support growth through monetary stimulus, but stubbornly high inflation has made it tough for the Reserve Bank of India to reduce borrowing costs.

The next monetary policy review is due on 18 December, but the bank has said any interest rate cut is ‘highly improbable’ at that meeting.

India’s economy is battling weak consumer demand in overseas and domestic markets. The rupee currency is close to record lows and the trade deficit the widest ever after merchandise exports fell for six straight months. Industrial output has contracted in four out of last six months.

Worryingly for hopes of a quick rebound, capital goods production a gauge for investment in the economy has expanded just once in the last 13 months.

Singh’s reform moves have bought him some time from global rating agencies, who are threatening to cut India’s sovereign debt to junk if its fiscal position does not improve.

In a major relief to the Government on Tuesday, rating agency Moody’s reaffirmed its stable outlook on India. Rivals Fitch and Standard and Poor’s are expected to reveal their thinking by March.

Goldman Sachs also offered some support on Thursday, with a report forecasting India’s economic growth was likely to accelerate to 6.5 per cent in 2013, backed by favourable external sector demand outlook and a pick-up in domestic reforms.

The Indian economy is likely to grow at 7.2 per cent in 2014, compared with 5.4 per cent in 2012, the report said.