India Growth Slows to Nine-Year Low as Rupee Drops to Record

India's Prime Minister Manmohan Singh
Prime Minister Manmohan Singh faces a struggle to bolster expansion as Europe’s debt crisis dims the global outlook and elevated inflation and a record trade deficit limit room for more interest-rate cuts to boost spending at home. Photographer: Pankaj Nangia/Bloomberg

India’s economic growth weakened to a nine-year low last quarter, hurt by an investment slowdown that has undermined the rupee and jeopardized Prime Minister Manmohan Singh’s development agenda. Bonds climbed and stocks fell.

Gross domestic product rose 5.3 percent in the three months ended March from a year earlier, compared with 6.1 percent in the previous quarter, the Central Statistical Office said in a statement in New Delhi today. The median of 31 estimates in a Bloomberg News survey was for a 6.1 percent gain. GDP climbed 6.5 percent in the year to March, the office said.

Singh faces a struggle to bolster expansion as Europe’s debt crisis dims the global outlook and elevated inflation and a record trade deficit limit room for interest-rate cuts to boost spending at home. Discord in the ruling coalition and claims of graft have impeded his push to open up the economy, damping investment and sending the rupee to its lowest level today.

“We can’t rule out the possibility of India facing a deeper slowdown in the absence of quicker economic reforms, when the central bank has limited room to cut rates,” said Samiran Chakraborty, head of regional research at Standard Chartered Plc in Mumbai. “India needs to send a clear message to investors that the policy bias will be towards boosting growth.”

Ten-year government bonds rallied the most in three weeks, with the yield on the 8.79 percent note due November 2021 dropping 15 basis points, or 0.15 percentage point, to 8.38 percent. The rupee touched an unprecedented low of 56.515 per dollar before strengthening to close 0.2 percent higher at 56.11. It has slumped 20 percent in the past year. The BSE India Sensitive Index of stocks fell 0.6 percent.

Government’s Target

The rise in full-year GDP compares with the 6.7 percent median estimate in a Bloomberg survey and 8.4 percent in 2010-2011. India’s goal is 9 percent annual expansion in a nation where about two-thirds of the population still lives on less than $2 a day, according to World Bank data.

Policy gridlock has contributed to slower investment, which Morgan Staley estimates fell to 34.4 percent of GDP last fiscal year from 38.1 percent in 2007-2008.

Manufacturing fell 0.3 percent in the three months through March from a year earlier, compared with a 0.6 percent gain in the previous quarter, today’s report showed. Farm output grew 1.7 percent, while construction climbed 4.8 percent.

Growth has also slowed in emerging nations from China to Brazil because of Europe’s crisis, which has damped demand for exports and reduced appetite for developing-nation assets.

Rupee Slide

Reserve Bank of India Governor Duvvuri Subbarao has pledged to take steps as needed to curb swings in the nation’s currency.

Its weakness threatens to stoke inflation by raising import costs. The pace of price increases climbed to 7.23 percent in April, the fastest among the largest emerging economies.

The trade deficit in Asia’s third-largest economy widened to a record $184.9 billion in 2011-2012, fanning concern about whether India can attract enough foreign capital to fund the excess of imports.

Finance Minister Pranab Mukherjee is also trying to narrow the budget deficit to 5.1 percent of GDP in the year that began April 1, from 5.9 percent, in part by limiting subsidies.

Some spending plans for the current fiscal year have been reduced by 10 percent as part of austerity measures, the government said separately today.

The GDP data are “disappointing,” Mukherjee said in a statement in New Delhi, adding the administration will take “all necessary steps” to address fiscal and trade imbalances.

Inflation Risks

The central bank has signaled government spending, the rupee’s drop and energy costs may curb scope for more rate cuts.

It lowered the benchmark rate to 8 percent from 8.5 percent on April 17, the first cut since 2009, after increasing it by a record 3.75 percentage points from mid-March 2010 to October last year to try and contain inflation.

Standard & Poor’s cut India’s credit outlook to negative from stable last month, imperiling its investment grade status and saying the political environment is “unfavorable.”

The government’s setbacks include the suspension in December of plans to allow foreign companies to open supermarkets in India after a coalition partner objected.

The prime minister defended India’s record earlier this month, saying GDP rose at one of the fastest paces in the world last fiscal year. Singh added he is “confident” of proving wrong skeptics who doubt India can sustain economic momentum.

Growth Outlook

The Reserve Bank projects 7.3 percent growth in 2012-2013, driven by the spending power of 1.2 billion people.

“The current problems facing the economy aren’t insurmountable,” said Prashant Jain, who oversees the equivalent of about $16 billion as chief investment officer at HDFC Asset Management Co. in Mumbai. “With a few difficult steps, it should be possible to put it back on the rails fairly quickly.”

Goldman Sachs Group Inc. downgraded its growth projection for the country on May 25, predicting a 6.6 percent GDP increase this fiscal year, down from 7.2 percent. It pared its outlook for further rate cuts to 50 basis points in 2012 from 75 points.

Some companies have been affected by slower expansion. Tata Steel Ltd., India’s biggest producer of the alloy, reported a 90 percent drop in profit in the three months through March.

India may face a difficult period of low growth and high inflation known as “stagflation,” said Hemindra Hazari, Mumbai-based head of research at Nirmal Bang Securities Pvt.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE