1.12.11

Growth slumps to 6.9%













India's economic growth slumped to its lowest in more than two years while output expansion at key industries tumbled to a six-year low, prompting Finance Minister Pranab Mukherjee to warn of “hard days” ahead. Growth in GDP, or the value of goods and services produced, dipped to 6.9% in the three months to September compared with 8.4% in the year-ago quarter, as rising interest rates and stubborn inflation crimped demand. Output growth in eight core industries, including steel, cement and coal, dropped to near-zero in October, a sharp decline from 7.2% a year ago, signaling the possibility of a sharp deceleration in industrial growth, given their more than one-third weight in the Index of Industrial Production, or IIP. Fiscal deficit for the first seven months of the year has reached 75% of the full-year estimate, adding to the gloom. Economists warned about a further slowdown. The Reserve Bank of India, which has raised rates by 375 basis points since March last year, has indicated it will pause rate increases but may not be in a position to start reversing them as many countries have begun to do because inflation has remained above 9% for 11 months. The GDP data released by the government on Wednesday revealed broad-based weakness in the economy, with mining contracting 2.9% and manufacturing rising a meagre 2.7% in the quarter gone by. Services and agriculture grew 9.3% and 3.2%, respectively. The finance minister expressed hope that the economy would recover some of its lost momentum, pegging the full-year growth estimate at 7.3%. GDP grew 8.5% last year. The government's chief economic advisor, Kaushik Basu, blamed the gloomy global scenario in addition to high inflation and slowdown in decision-making for the slump in growth. Experts were also concerned about the dismal consumption or expenditure estimates of GDP. Consumption demand growth, as measured by private final consumption expenditure, slowed down to 5.9%, the lowest in the new series of data with 2004-05 as the base year. Gross fixed capital formation, a measure of investments, declined 0.6%. The dismal 0.1% growth in core sector output in October, and the sequential decline in investments and private consumption, suggest the environment of high inflation, rising interest rates, and overall pessimism have forced consumers and corporates to cut spending. The decision to open up FDI in retail had given some hope that the government would unleash a slew of policy measures to galvanise investments, but it remains to be seen if the UPA leadership remains firm on the decision in the face of shrill political opposition. Several broking firms have revised their GDP growth estimates recently. Citi has cut growth estimate for the current year to 7.1% from 7.6% earlier and to 7% for fiscal 2012-13. Bank of America Merrill Lynch has cut its forecast for next year to 6.8%.

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