India slowdown a case for reforms
A SLOWDOWN in India’s economy in the last quarter will increase calls for Prime Minister Narendra Modi to step up reforms but was less severe than feared, giving the central bank ammunition to resist government pressure to cut interest rates.
Gross domestic product (GDP) expanded 5.3 percent in the July-September quarter from a year earlier, as a manufacturing slump took the bounce out of Asia’s thirdlargest economy.
Growth in the previous quarter was at a two-and-a-half year high of 5.7 percent.
Thanks to growth in services and stronger-thanexpected farming after a bad monsoon, the reading was higher than predicted by economists polled by Reuters, who on average forecast economic growth of 5.1 percent.
“Now the onus is on the government to boost growth by reviving the investment climate and get reforms moving,” said Shivom Chakrabarti, a senior economist with HDFC Bank. “That will have a more pronounced impact on growth in the next fiscal year.”
Worried by the growth performance, and encouraged by low oil prices and falling inflation, Finance Minister Arun Jaitley will reiterate his request that Reserve Bank of India governor Raghuram Rajan cut interest rates when the central bank holds its policy review tomorrow, ministry officials have said.
Rajan can be expected to argue that with the slowdown not as severe as some forecast, inflation concerns carry more weight. “If it was a very, very low number, there would have been pressure on the governor to act immediately. The better- than-expected overall GDP growth gives him that cushion” to wait, said Upasna Bhardwaj at ING Vysya Bank.
Rajan is expected to argue that with the slowdown not severe, inflation concerns carry more weight.
Economists polled by Reuters said a cut was unlikely, although markets had priced in a 25 basis point cut in the repo rate to 7.75 percent.
India is behind China, but among other large emerging economies it fares relatively well. On Friday, Brazil crawled from recession with quarterly growth of 0.1 percent.
Elected in May with the first single party majority since the early 1980s, Modi was expected to live up to his market-friendly reputation by aggressively pursuing a reform agenda to remove obstacles to India’s industrialisation.
Instead, his government has consolidated power by winning provincial elections to gain control of key states while offering little in the way of substantial new legislation.
The measures Modi has taken so far, including allowing more foreign investment in defence and construction, slashing red tape for businesses and ending major fuel subsidies, have yet to change the mood on the ground.
Poor corporate earnings in the September quarter highlighted weak consumer demand.
The global outlook has not helped, with India’s exports slowing in the second quarter after orders from Europe dropped. – Reuters