Friday 1 June 2012

The Indian economy


India's fourth quarter GDP grows at 5.3%, below expected 6.1%
India's annual GDP growth slumped in the January-March quarter to a nine-year low of 5.3 per cent as the manufacturing sector shrank and a fall in the rupee to a record low suggests the economy remains under pressure in the current quarter


31 May, 2012

Thursday's figures mark a dramatic slide in fortunes for a country that was growing in the years before the global financial crisis at more than 9 per cent, with ambitions to challenge China as the world's top emerging economy.

"This is definitely a very important signal for the government—this is a make or break situation for India and the government has to step on the panic button," said Rupa Rege Nitsure, chief economist at Bank of Baroda in Mumbai. "If the government doesn't step in now, India's sovereign ratings may be jeopardised."

The 5.3 per cent growth rate was much lower than expected and was even below the lowest forecast in a Reuters poll that had produced a median of 6.1 per cent from predictions ranging between 5.5 per cent and 7.3 per cent.

Quarterly expansion was last lower in the January-March quarter of 2003 at 3.6 per cent, Thomson Reuters data showed.

The data showed that the manufacturing sector shrank 0.3 per cent in the quarter compared with a year earlier. The farm sector grew just 1.7 per cent.

Gross domestic product rose 6.5 per cent in the fiscal year to the end of March 2012, the lowest growth rate since 4.0 per cent in 2002-03 and a sharp slowdown from the previous year's 8.4 per cent.


"The data highlights the unusual degree of weakening of the country's economy, likely driven by poor investment and widening trade gap," said Dariusz Kowalczyk, an economist at Credit Agricole CIB in Hong Kong. "The data also poses a dilemma for policymakers, as they have no fiscal room to stimulate growth, while monetary easing scope is very narrow, at least for now, due to rebounding and high inflation."

The yield on the benchmark 10-year government bonds was down 13 basis points on Thursday.

The BSE Sensex extended its declines after the data to 1.3 per cent on the day.

Anubhuti Sahay, an economist at Standard Chartered Bank in Mumbai, said the data was "shocking".

"A rate cut is a given now," Sahay said.

Standard & Poor's cut India's credit rating outlook in April to negative from stable, worried by India's fiscal and current account deficits. The decision jeopardises India's long-term rating of BBB minus, the lowest investment grade rating.

The impact of the euro zone debt crisis, a lack of economic reforms and high interest rates dragged on India's growth throughout last year.

Before Thursday's data, private economists had cut forecasts for Asia's third-largest economy to between 6 per cent and 6.5 per cent for the fiscal year to March 2013. The government forecasts close to 7.5 per cent.

Rupee slump

The rupee fell on Thursday to a record low beyond 56.50 per dollar. Its slide of 14 per cent from its 2012 high adds to inflation concerns in the country and raises its import bill, putting pressure on the trade and current accounts.

That leaves policymakers in a bind. The government ran a fiscal deficit in the year to March 2012 of 5.9 per cent of GDP so has little room to stimulate the economy.

The RBI will be wary that reducing rates could fuel inflation, which is already uncomfortably above 7 per cent. The government is trying to push through the biggest increase in petrol prices on record to reduce its subsidy bill, sparking popular anger and plans for nationwide strikes.

"The Reserve Bank of India has already adopted a pro-growth policy. But inflation is not softening, so it cannot do a significant rate cut. We think they will focus more on making liquidity surplus," said Sujan Hajra, chief economist at Anand Rathi Securities in Mumbai.

There is little evidence that economic conditions have picked up in the April-June quarter.

The HSBC purchasing managers' index suggested the factory sector picked up in April, but the output index fell for a third straight month.

Car sales in April rose just 3.4 per cent from a year earlier, the weakest pace since October, when they dropped 24 per cent.

Domestic demand and corporate investment have been hit hard by 13 central bank rate hikes between mid-2010 and last October.

The Reserve Bank of India (RBI) cut rates by 50 basis points last month, but warned it saw limited scope for further cuts partly because inflation remained high.

"The RBI is fighting a multi-faceted battle - managing the currency, supporting growth, fighting inflation. I think they will wait for fiscal consolidation before cutting rates further," said Rahul Bajoria, regional economist at Barclays in Singapore.

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