India GDP Grows the Least Since ’09, Adding to Rate-Cut Case

India GDP Grows the Least Since 2009
Produce is sold at a market in Kolkata, India. Photographer: Brent Lewin/Bloomberg

India’s economy grew at the slowest pace in more than two years last quarter as domestic demand weakened and the global recovery faltered, adding pressure on the central bank to lower interest rates.

Gross domestic product rose 6.1 percent in the three months through December following the previous quarter’s 6.9 percent climb, the Central Statistical Office said in a statement in New Delhi today. The median of 29 estimates in a Bloomberg News survey was for a 6.3 percent advance.

The Reserve Bank of India has signaled readiness to join nations from Brazil to Indonesia in cutting borrowing costs to aid the economy as price rises ease, saying steps to curb the fiscal deficit in March’s budget would boost its scope to act. Borrowing costs are at their highest level since 2008 to fight inflation, sapping expansion as policy gridlock hurts investment.

“Growth will remain subdued in the next few quarters,” said Sonal Varma, a Mumbai-based economist at Nomura Holdings Inc. “Slowing growth and cooling inflation are creating conditions for the RBI to cut rates, but a larger budget deficit is limiting the central bank’s space.”

The rupee strengthened 0.1 percent to 49.0238 per dollar at the close today. It has rebounded 8.2 percent so far in 2012 after sliding 16 percent last year, the worst fall in Asia. The BSE India Sensitive Index rose 0.1 percent. The yield on the 8.79 percent note due November 2021 fell one basis points, or 0.01 percentage point, to 8.2 percent.

Europe’s Impact

Asian officials are striving to weather the impact of Europe’s debt crisis on the world economy, which remains in “the danger zone,” according to International Monetary Fund Managing Director Christine Lagarde. Growth slowed last quarter in nations such as China and South Korea as exports moderated.

The Reserve Bank’s record 3.75 percentage points of increases in the repurchase rate from March 2010 to October last year, to 8.5 percent, also crimped expansion in Asia’s third-largest economy.

Manufacturing in India rose 0.4 percent in the three months through December from a year earlier, slower than the 2.7 percent gain in the previous quarter, today’s report showed. Mining fell 3.1 percent, farm output climbed 2.7 percent and construction grew 7.2 percent.

Indian inflation eased to a 26-month low of 6.55 percent in January, after exceeding 9 percent for most of 2011. It remains the fastest in the so-called BRIC group that also includes Brazil, Russia and China. Credit Suisse Group AG predicts the Reserve Bank will cut rates by 175 basis points by January 2013.

Fiscal Deficit

Governor Duvvuri Subbarao reviews rates on March 15, the day before Finance Minister Pranab Mukherjee unveils the budget for the next fiscal year. The government forecasts GDP may rise 6.9 percent in the year through March, the least since 2009.

The Reserve Bank on Jan. 24 cut the amount of deposits lenders need to set aside as reserves for the first time since 2009, seeking to ease a cash squeeze.

It said inflationary threats, such as the fiscal deficit and energy prices, made it “premature” to start reducing borrowing costs, while reinforcing guidance that future rate actions will be towards lowering them.

The deficit exceeded the full-year target in the 10 months through January, another report showed today, reaching 4.35 trillion rupees ($88.7 billion). The government’s goal was 4.13 trillion rupees in the year through March.

Economic Stability

The shortfall may surge to 6.1 percent of GDP in the current fiscal year, according to Nomura Holdings Inc. and Kotak Mahindra Bank Ltd., exceeding Mukherjee’s goal of 4.6 percent. Slower growth has hurt tax receipts even as subsidies and an employment guarantee program for rural workers spur spending.

“The major priority for macro-economic stability and reviving growth today is fiscal consolidation,” said Rupa Rege Nitsure, an economist at state-owned Bank of Baroda in Mumbai.

Millions of Indian government employees went on strike yesterday, protesting the cost of living and plans to sell stakes in state-run companies to help plug the budget gap. Trade unions say the disposals will lead to job losses.

As growth slows, companies are also struggling. Maruti Suzuki India Ltd., the country’s biggest carmaker, posted a 64 percent drop in third-quarter net income as demand waned.

India’s investment-to-GDP ratio was 30 percent last quarter, less than a recent high of 34 percent in the three months through September 2010, according to government data.

Prime Minister Manmohan Singh’s administration is under pressure to step up efforts to bolster the economy, after claims of graft and protests stalled its legislative agenda.

The government in December suspended its decision to allow foreign retailers such as Wal-Mart Stores Inc. to open supermarkets. Once the global economy stabilizes, India will return to 8.5 percent to 9 percent trend expansion, Singh said in an interview the same month.

“What India urgently needs is expediting policy reforms to attract higher investments,” said Jay Shankar, an economist at Religare Capital Markets Ltd. in Mumbai. “We need to get out of the policy logjam soon to achieve the aspiration of double-digit growth.”

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