India’s Growth Cools Amid High Rates
September 1, 2011 at 13:37
Regional News
NEW DELHI—India’s economy grew 7.7% in the April-to-June period from a year earlier, its slowest pace in six quarters, confirming fears that a series of interest-rate increases, combined with the global slowdown and a lack of local reforms, have kept growth well below the government’s estimate.
The growth data, however, don’t indicate a broad-based slowdown; the services sector, which accounts for 58% of India’s gross domestic product, grew 10% despite a muted 5.1% expansion in industries. India’s April-June expansion was only slightly lower than the 7.8% growth in the preceding quarter, though it lagged behind the 8.8% increase in the same period last year.
Still, improvement seems unlikely, as prolonged monetary tightening begins to have a greater effect on the economy, squeezing investments and slowing growth to a rate that economists say won’t be enough to pull millions out of poverty and spur consumption.
The Congress party-led government, burdened by multiple graft charges, has been criticized for a policy paralysis that has dented overseas investors’ confidence. A massive popular protest, led by social activist Anna Hazare, recently forced Parliament to move on an antigraft bill—an event many analysts say could shake the government out of its slumber.
A survey of nearly 300 companies by the Federation of Indian Chambers of Commerce and Industry shows India’s business confidence plunged to a two-year low of 51.6 in the April-June quarter from 63.7 in the preceding period.
Some urgent overhauls are seen as necessary to help Asia’s third-largest economy grow by closer to double digits to compete with China.
“The much-warranted policy thrust remains absent amidst a scenario of higher cost of financing and elevated level of commodity prices,” said Shubhada Rao, chief economist at Yes Bank.
Finance Minister Pranab Mukherjee said he was “disappointed” with the latest GDP figures, but added that growth was robust when compared with the gloomy global economic performance. The government retained its full-year forecast of 8.2% growth—from an initial 9% projection.
Credit Suisse analyst Devika Mehndiratta cautioned that the latest growth data could be masking real economic activity, as the government adopted a new factory-output index that helped inflate the reading.
The chief economic adviser to the finance ministry, Kaushik Basu, added that growth is unlikely to be much different in the July-September quarter, but that a substantial improvement is expected from October, and especially in January-March 2012.
The central bank isn’t expected to shift its tightening stance, at least in the near term, as fighting inflation remains its top priority, analysts said. The Reserve Bank of India, after raising the policy rate 11 times since March 2010, is likely to raise the rate by 25 basis points, or hundredths of a percentage poine, in its Sept. 16 review meeting before pausing, as the global economic outlook remains bleary, said Leif Lybecker Eskesen, chief economist for India at HSBC.
Government bonds slipped after the data release. The stock market benefited, with the benchmark Sensitive Index closing 1.6% higher.
Write to Anant Vijay Kala at [email protected]
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By: Abhrajit Gangopadhyay and Anant Vijay Kala
Source: The Wall Street Journal, Aug. 31, 2011
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