November 30, 2011

Indian GDP growth slips to 6.9%

India's economy grew at the slowest rate for more than two years in the second quarter, confirming the country's shift to lower growth rates of about 7 per cent.

Data released on Wednesday showed economic growth for the quarter to the end of September slowed to an annualised 6.9 per cent, weighed on by almost two years of progressive monetary tightening, low domestic business confidence and a retreat of foreign capital.

In addition, India's policymakers have been unable to tame inflation raging at near double-digit levels.

The last time India's gross domestic product growth fell below 7 per cent was in the quarter to June 2009, when it was struck by the effects of the global financial crisis in western economies.

The drop in the latest quarter -- from the 7.7 per cent recorded in the three months to the end of June -- will raise questions over whether India can achieve the government's official target for economic growth in the 2012 fiscal year of 8.5 per cent. 

Some analysts have been encouraged in recent weeks by the Congress party-led government's efforts to unleash economic reforms in the face of falling growth. 

"India often ultimately reforms when it reaches crisis point," said Deepak Lalwani, director of Lalwani Capital, a UK-based investment advisory business. 

He said the trigger for greater dynamism was a slowing economy and the rupee falling to an all-time low. Investments have slowed, government finances are stretched and local business leaders complain about policy paralysis. 

In response to the weakening outlook, the cabinet last week agreed a key reform to bring more foreign investment into the retail sector. It decreed that foreign companies would be able to have majority control of multi-brand retail operations and outright ownership of single brand stores. 

Rohini Malkani, economist at Citigroup, the US banking group, in Mumbai, said India was enduring a tough fiscal year with a cocktail of domestic and global challenges. 

"Tough times don't always last, but they can last long enough to do more damage to the economic structure and momentum," she said. "As a result, we have seen India growth expectations come off from 9 per cent levels to 7 per cent, with growing doubts on whether even a 7 per cent rate can hold."  

Her bank forecasts economic growth in 2012 at 7.1 per cent, with a decline in the next year to 7 per cent.
Many Indian policymakers blame the weaker global economy, and especially the eurozone crisis, for India's slowing economic performance rather than troubles closer to home in what is widely seen as a domestically driven economy. 

Montek Singh Ahluwalia, the deputy chairman of the Planning Commission, has adjusted his growth forecast to between 7 per cent and 7.5 per cent for the year. 

He said that India was suffering "a short-term cyclical slowdown" that would start to improve after three months. Many consider India's interest rate cycle to have peaked and predict cuts in benchmark interest rates within the first six months of next year. 

"We have to do something to reverse [the slowdown]," Mr Ahluwalia said. "It's not something that will get reversed automatically."

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