Slowdown Hits Hard as Growth Slumps to 6.9%

POLICY PANGS: Core growth sinks to near-zero as consumers and corporates cut back on spending, multiplying the RBI’s dilemma on how to control inflation as growth withers

OUR BUREAU NEW DELHI 

    India's economic growth slumped to its lowest in more than two years while output expansion at key industries tumbled to a six-year low, prompting Finance Minister Pranab Mukherjee to warn of “hard days” ahead. Growth in GDP, or the value of goods and services produced, dipped to 6.9% in the three months to September compared with 8.4% in the year-ago quarter, as rising interest rates and stubborn inflation crimped demand. 
Output growth in eight core industries, including steel, cement and coal, dropped to near-zero in October, a sharp decline from 7.2% a year ago, signaling the possibility of a sharp deceleration in industrial growth, given their more than one-third weight in the Index of Industrial Production, or IIP. 
Fiscal deficit for the first seven months of the year has reached 75% of the full-year estimate, adding to the gloom. 
Economists warned about a further slowdown. “Due to a combination of both domestic issues and worsening global prospects, we expect the growth to slow further,” said Rohini Malkani, economist with Citibank. 

The Reserve Bank of India, which has raised rates by 375 basis points since March last year, has indicated it will pause rate increases but may not be in a position to start reversing them as many countries have begun to do because inflation has remained above 9% for 11 months. 

• The GDP data released by the government on Wednesday revealed broad-based weakness in the economy, with mining contracting 2.9% and manufacturing rising a meagre 2.7% in the quarter gone by. Services and agriculture grew 9.3% and 3.2%, respectively. “Now, hard days are coming,” Mukherjee said after the data was released. “Present uncertainty with regard to the global situation is creating concerns about FII and FDI flows. We will continue to adjust our policies according to the developments.” Consumption Demand Slu

• • The finance minister expressed hope that the economy would recover some of its lost momentum, pegging the full-year growth estimate at 7.3%. GDP grew 8.5% last year. 

• The government's chief economic advisor, Kaushik Basu, blamed the gloomy global scenario in addition to high inflation and slowdown in decision-making for the slump in growth. “The third quarter will also be a difficult quarter, but in fourth quarter we should see a very good pick-up,” he said. 

• Experts were also concerned about the dismal consumption or expenditure estimates of GDP. Consumption demand growth, as measured by private final consumption expenditure, slowed down to 5.9%, the lowest in the new series of data with 2004-05 as the base year. Gross fixed capital formation, a measure of investments, declined 0.6%. 

• The dismal 0.1% growth in core sector output in October, and the sequential decline in investments and private consumption, suggest the environment of high inflation, rising interest rates, and overall pessimism have forced consumers and corporates to cut spending. “Leading indicators such as intermediate goods and capital goods remain soft, with no strong pick-up likely in the coming months,” said Rahul Bajoria and Siddhartha Sanyal of Barclays Capital. 

• Indranil Pan, chief economist, Kotak Bank, said, “Investments are not picking up and there is not too much firepower on the fiscal front.” 

• The economy’s woes are not being helped by a weakening rupee, which is making commodity imports expensive. The currency has depreciated 18% since August, the worst performer in Asia. “Exchange rate is the new joker in the pack,” said Madan Sabnavis, chief economist, CARE Ratings. The decision to open up FDI in retail had given some hope that the government would unleash a slew of policy measures to galvanise investments, but it remains to be seen if the UPA leadership remains firm on the decision in the face of shrill political opposition. 

• Several broking firms have revised their GDP growth estimates recently. Citi has cut growth estimate for the current year to 7.1% from 7.6% earlier and to 7% for fiscal 2012-13. Bank of America Merrill Lynch has cut its forecast for next year to 6.8%.

                                                                                                                                            

                                                                                                                                           

Market Report

Sensex Rebounds as Q2 Earnings Meet Forecast

Index gains 115 pts, with Reliance taking the lead

The benchmark index of the Bombay Stock Exchange (BSE) Sensex closed a choppy session 0.7% higher on Wednesday, reversing early losses as secondquarter growth met forecast, with Reliance Industries leading the gains while gloomy global economic conditions continued to weigh. 

Dragged down by turmoil overseas, rampant inflation and a series of interest rate hikes by Asia’s most hawkish central bank, data on Wednesday showed India’s economy grew 6.9% in the last quarter, its slowest rate in more than two years. Carmakers and engineering and construction firms fell, as the data revealed the heavy toll global factors and home-grown problems were taking on the economy. 

“GDP was bang in line with expectations and that's the main reason why the market moved up,” said Dipen Shah, head of research for private client group at Kotak Securities in Mumbai. “Given the slowing growth, there’s a sense in the market that the central bank might pause in its tightening cycle.” 

The main 30-share index closed up 115 points, or 0.72%, at 16,123.46 points, with 20 of its components gaining. Energy major RIL, India’s most valuable firm by market capitalisation, closed up 1.7% at . 778.25, after media reports said the oil and gas major was looking to raise $1 billion to fund its shale gas ventures in the US. Tata Motors, India’s third-largest car maker by domestic sales, saw its shares close down 2.6% at . 172.80. Fellow automaker Hero MotoCorp ended down 3% at . 1,999.70. Toughening domestic economic conditions have chipped away demand for vehicles, dragging automakers, while engineering and construction firms have warned of deferred projects and slowing investment spending. 

L&T shed 0.4% to close at . 1,272.15, after falling as much as 2.1% intra-day. Construction firm Jaiprakash Associates ended the day at . 62.10, down 1.7%. Banking and finance stocks rallied after the release of the GDP data, helping lift the benchmark index into positive territory. The 50-share NSE index Nifty closed up 0.56% at 4,832.05 points. 

The MSCI's broadest index of Asia Pacific shares outside Japan fell 0.34% and Japan’s Nikkei closed down 0.51%. SBI, the country’s top lender, ended the day at . 1,762.45, up 0.1%. The stock rose as much as 1.9% after the data release, gaining back lost ground.