India's economy grew at its weakest pace in more than two years in the quarter that ended in September, revealing the heavy toll that stubborn inflation, rising interest rates and crisis-hit global capital markets are having on Asia's third-biggest economy.
Gross
domestic product growth fell to 6.9 percent in the second quarter of
the financial year, slipping below 8 percent for the third straight
quarter.
Weakness in the second quarter was broad-based.
Manufacturing, accounting for 16 percent of GDP, grew at only 2.7
percent and mining contracted 2.9 percent.
Economists
suspected the pace of economic growth may languish at seven percent in
the coming quarters, and that even if the central bank isn't willing to
cut interest rates, it might feel compelled to ease monetary conditions
by other means.
The economy has been hit by a confluence of
factors. Inflation has been persistently high all year, policy inertia
has hurt investment and industrial output and, now, capital outflows
have pushed the rupee to new lows.
While investors have
called for economic reforms — such as making land acquisition for
industry easier and opening up the retail market to foreign firms —
there appear few short-term fixes.
Montek Singh
Ahluwalia, deputy head of the planning commission and one of Prime
Minister Manmohan Singh's closest advisors, said a stimulus was
unlikely, adding that growth in the next quarters may improve.
"We
hope these problems will be overcome in the second half of the year.
Plus we hope that investment implementation hurdles will get overcome
and that should give a boost to investment especially in the
infrastructure sector."
There is little
fiscal room for the government, which has already announced extra
spending of around $11 billion and is struggling to meet its fiscal
deficit target.
"It will be tough for the government to
provide any fiscal stimulus to revive growth as their finances are
already strained and they need to ensure the fiscal deficit doesn't get
out of control," said D.K. Joshi, chief economist at Crisil in Mumbai.
"So they will have to do some tough balancing act."
Finance
Minister Pranab Mukherjee said the global economic situation was
depressing growth, and forecast GDP growth for full-year ending in March
2012 dropping to 7.3 percent from an initial prediction of around 9
percent.
The headline GDP figure was in line with the
median forecast in a Reuters poll for an annual rise of 6.9 percent, and
compares with 7.7 percent growth in the previous quarter.
India's
benchmark 10-year federal bond yield eased briefly to 8.75 percent at
0525 GMT, down 8 basis points on the day, while stocks reversed early
losses and were up 0.2 percent.
Political Pressure
The
slowing economy will also add to pressure on the ruling Congress
party-led coalition, hit by corruption scandals and policy limbo ahead
of crucial state polls next year that will pave the way for a 2014
general election.
Thirteen interest rate increases have
failed to arrest inflation, which is close to a double-digit rate, and
high food prices have proved one of the biggest issues for voters.
The
Reserve Bank of India (RBI) has indicated the low possibility of
another rate increase, and some economists said Wednesday's data would
add to the pressure to hold back on any tightening.
"The
GDP data increases chances of monetary easing as it is a sharp drop and
the weakest growth since 2009," said Dariusz Kowalczyk, senior economist
and strategist at Credit Agricole in Hong Kong.
Some
analysts said that while rates may not be cut, there could be some
measures to raise liquidity and help private investment. The RBI could
for instance reduce the proportion of their deposits banks have to place
at the central bank.
"There
is significant weakness in the economy, and that is what needs to be
factored in," said Saugata Bhattacharya, economist at Axis Bank in
Mumbai.
"There will probably be some easing action, I
don't know if it will be a rate cut. I think it will come firstly in
liquidity, and then a rate cut."
The Indian economy grew
at 8.5 percent in 2010/11. GDP growth has been below 8 percent for the
past three quarters. Indian corporates, particularly in the auto and
real estate sector, have been hit by rising input costs and a slowdown
in demand.
Farm output has gradually declined. It rose an
annual 3.2 percent in the July-September quarter, down from the previous
quarter's 3.9 percent growth.
Growth has been slowing
across Asia owing to the slump in demand from stalling developed
economies. China's economy slowed down to 9.1 percent in the third
quarter, from 9.5 percent in the second quarter, while the OECD cut its
forecasts for the global economy to 3.4 percent for 2012.
The
global economic recovery is running out of steam, leaving the euro zone
stuck in a mild recession and the United States at risk of following
suit, the OECD said on Monday, sharply cutting its forecasts.