Indian growth weakest in 9 years

NEW DELHI: India’s annual economic growth slumped in the JanuaryMarch quarter to a nine-year low of 5.3% as the manufacturing sector shrank and a fall in the rupee to a record low suggests the economy remains under pressure in the current quarter.

Yesterday’s figures mark a dramatic slide in fortunes for a country that was growing in the years before the global financial crisis at more than 9%, with ambitions to challenge China as the world’s top emerging economy.

Foreign investors are now wary after a series of government flipflops on economic reform and tax, heavy government spending on subsidies and a fiscal budget deficit that is threatening the country’s investment-grade credit rating.

“This is definitely a very important signal for the government – this is a make or break situation for India and the government has to step on the panic button,” said Rupa Rege Nitsure, chief economist at Bank of Baroda in Mumbai.

“If the government doesn’t step in now, India’s sovereign ratings may be jeopardised.”

The 5.3% growth rate was much lower than expected and was even below the lowest forecast in a Reuters poll that had produced a median of 6.1% from predictions ranging between 5.5% and 7.3%.

Quarterly expansion was last lower in the January-March quarter of 2003 at 3.6%, Thomson Reuters data showed.

The data showed that the manufacturing sector shrank 0.3% in the quarter compared with a year earlier. The farm sector grew just 1.7%.

Gross domestic product rose 6.5% in the fiscal year to the end of March 2012, the lowest growth rate since

Manufacturing sector shrinks, rupee at record low

4% in 2002-03 and a sharp slowdown from the previous year’s 8.4%.

The yield on India’s benchmark 10-year government bonds was down 13 basis points yesterday.

India’s main stock index extended its declines after the data to 1.3% on the day.

Standard & Poor’s cut India’s credit rating outlook in April to “negative” from “stable”, worried by India’s fiscal and current account deficits. The decision jeopardises India’s long-term rating of BBB minus, the lowest investment grade rating.

The impact of the eurozone debt crisis, a lack of economic reforms and high interest rates dragged on India’s growth throughout last year.

Before yesterday’s data, private economists had cut forecasts for Asia’s third-largest economy to between 6% and 6.5% for the fiscal year to March 2013. The government forecasts close to 7.5%.

The rupee fell yesterday to a record low beyond 56.50 per dollar. Its slide of 14% from its 2012 high adds to inflation concerns in the country and raises its import bill, putting pressure on the trade and current accounts.

That leaves policymakers in a bind. The government ran a fiscal deficit in the year to March 2012 of 5.9 percent of GDP so has little room to stimulate the economy.

The central bank will be wary that reducing rates could fuel inflation, which is already uncomfortably above 7%.

The government is trying to push through the biggest increase in petrol prices on record to reduce its subsidy bill, sparking popular anger and plans for nationwide strikes. – Reuters