New Delhi: 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 stubbornly high inflation, rising interest rates and crisis-hit global capital markets are having on Asia's third-biggest economy.
Weakness in the second quarter was broad-based, with manufacturing growing at only 2.7 per cent and mining contracting 2.9 per cent, and reinforcing the view that the central bank will have to stop its tightening policy.
Gross domestic product growth fell to 6.9 per cent in the second quarter of the financial year, slipping below 8 per cent for the third straight quarter.
The GDP figure was in line with the median forecast in a Reuters poll for an annual rise of 6.9 per cent, and compares with 7.7 per cent growth in the previous quarter.Commentary:Radhika Rao, Economist, Forecast PTE, Singapore:
"While local financial markets take heart from the near-consensus GDP number, one cannot escape from the fact that today's headline marked the slowest rise since Q2 2009 and trajectory hereon is firmly biased for weakness.
"Confluence of factors are weighing on the growth trend -- high and sustained price pressures, piecemeal reforms, increase in borrowing costs hurting investment interests along side weak external environment.
"To some extent the slower and more manageable growth trend could have been engineered by the authorities, though sluggishness in underlying drivers suggest there is more pain in store before scope for revival.
"The RBI will prefer to maintain status quo on rates into FY13 when inflation is firmly on deceleration mode."Dariusz Kowalczyk, Senior Economist and Strategist, Credit Agricole CIB, Hong Kong:
"The GDP data increases chances of monetary easing as it is a sharp drop and the weakest growth since 2009."Rupa Rege Nitsure, Chief Economist, Bank of Baroda, Mumbai:
"The pulldown in growth is primarily because of mining and manufacturing.
"The country has been facing stress in its mining sector and going forward services sector too is unlikely to be able to maintain its growth. So despite the busy season in the second half of the year, full year growth will only be around 7 to 7.2 per cent.
"I expect the central bank to continue maintaining a status quo at least until end-March 2012."Indranil Sengupta, Economist, Bank of America-Merrill Lynch, Mumbai:
"It's more or less in line with our expectations, and we're expecting it to stay around this level of 7 per cent for the remaining quarters of this financial year."Saugata Bhattacharya, Economist, Axis Bank, Mumbai:
"My sense is that the RBI will not react to this number immediately, this is something that was probably known.
"What this number definitely indicates is even their 7.6 per cent GDP projection for the full year might be a little optimistic. It is likely to come around 7.1 or thereabout.
"There is significant weakness in the economy, and that is what needs to be factored in. 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."Sujan Hajra, Chief Economist, Anand Rathi Securities, Mumbai:
"Broadly speaking, for the whole year, India can still clock anything between 7.5 to 7.8 per cent growth. As far as monetary policy is concerned, the RBI's guidance that it will be pausing in December still holds.
"I don't expect the RBI to start cutting rates, but it might do some liquidity enhancing measures like lowering its cash reserve ratio in February-March."Shakti Satapathy, Fixed Income Strategist, A K Capital, Mumbai:
"The slowdown in agriculture and investment data are expected to keep the tussle between growth-inflation dynamics intact in the near term.
"Further the policy logjams on key sectoral reforms are making a hindrance for growth drivers in the economy and thus extending the worry of supply bottlenecks.
"The service sector data doesn't indicate significant moderation. However, with declining manufacturing activities, a moderation in the services output might be expected."Market reaction:
Shares briefly pulled into positive territory after the data. The BSE Sensex was trading down 0.3 per cent at 11:45 a.m. (0615 GMT), after erasing losses of 0.7 per cent before the data and rising as much as 0.1 per cent.
The rupee was trading at 52.18/19 per dollar from 52.15/16 beforehand.
The yield on the new 10-year benchmark bond eased briefly to 8.76 per cent from 8.77 per cent before the data. It had closed at 8.83 per cent on Tuesday.Background:
- A policy paralysis in the wake of a slew of graft scandals, combined with high inflation, rising interest rates and an uncertain global economic environment are undermining India's domestic demand-driven growth story.
- The annual growth rate for the fiscal year ending March 2012 was originally budgeted at 9 per cent. Some policymakers, of late, have begun to concede economic growth could be as low as 7 per cent.
- The Reserve Bank of India (RBI) has already cut its growth projection for the current fiscal year to 7.6 per cent from 8 per cent, but many private economists see the full-year growth to be lesser than the bank's estimate.
- Industrial output growth at 1.9 per cent in September was the worst in two years.
- Car sales slumped an annual 23.8 per cent in October, the biggest monthly fall since December 2000, as high interest rates, vehicle costs and labour unrest at Maruti Suzuki dampened demand.
- Annual exports growth slumped to 10.8 per cent in October from 36 per cent a month earlier.
- Service sector contracted for a second straight month in October, as new business grew at its weakest pace since May 2009.
- The Reserve Bank of India has raised rates 13 times since March 2010 to control inflation that has stayed above 9 per cent for nearly a year.
- However, in an acknowledgement of mounting risks to economic growth, the RBI last month hinted it may pause its rate tightening cycle as it expects the headline inflation to ease to 7 per cent by March from 9.73 per cent in October.
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