India Growth Matching 3-Year Low Adds Policy-Revamp Pressure

Indian Economy Expands 5.3% July-Sept. Qtr; Median Est. 5.3%
Villagers sit outside their homes in Makhla village, Maharashtra, India. Photographer: Sanjit Das/Bloomberg

Indian expansion slowed last quarter to match a three-year low as growth in domestic spending and exports moderated, adding pressure on the government to extend an economic-policy overhaul to spur investment.

Gross domestic product rose 5.3 percent in the three months to Sept. 30 from a year earlier, in line with the median of 42 estimates in a Bloomberg News survey and down from 5.5 percent in the previous quarter, data from the Central Statistical Office showed in New Delhi today.

Prime Minister Manmohan Singh’s push to lure more foreign investors has been hurt by the widest budget deficit in major emerging nations and a weaker rupee. Parliamentary opposition to his drive to open industries such as retail to overseas companies risks legislative gridlock, clouding the outlook as inflation above 7 percent limits room for interest-rate cuts.

“Growth has most likely bottomed out,” said Leif Eskesen, an economist for India and Southeast Asia at HSBC Holdings Plc in Singapore. “But a recovery in India is completely conditional on reforms.”

The rupee, down 3.8 percent versus the dollar in the past year, strengthened 1 percent to 54.265 per dollar at the close in Mumbai. The BSE India Sensitive Index of stocks advanced 0.9 percent, while the yield on the 8.15 percent bonds due June 2022 fell to 8.18 percent from 8.21 percent yesterday.

Minority Government

The ruling coalition, striving to avert a credit-rating downgrade, snapped months of paralysis in September by curbing energy subsidies and giving overseas retailers such as Wal-Mart Stores Inc. the chance to set up supermarkets.

The measures cost Singh his majority in parliament after some lawmakers said family-run stores will have to close down.

Objections to a government agenda that also seeks increased foreign participation in insurance and pensions may harden if it loses a vote due next week on the retail step. Singh acceded to the poll after the opposition disrupted the legislature.

“It’s unlikely they can push through insurance and pension” as the coalition isn’t united on the issue, said Prasanna Ananthasubramanian, an economist at ICICI Securities Primary Dealership Ltd. in Mumbai.

Private consumption climbed 3.7 percent last quarter from a year earlier, compared with 4 percent in April-to-June, calculations by Bloomberg News based on today’s report showed. Exports rose at a 4.3 percent pace, down from 10.1 percent. Investment advanced 4.1 percent.

Fiscal Deficit

Inflation measured by the wholesale-price index was 7.45 percent in October, the fastest in the BRIC group of largest emerging markets that also includes Brazil, Russia and China.

India also has the widest BRIC fiscal gap. The shortfall reached 3.68 trillion rupees ($67.5 billion) in the seven months to Oct. 31, or nearly 72 percent of the goal for the 12 months through March 2013, another release showed today.

Despite a trend of curbing expenditure that began in September, India will post a gap of 5.8 percent of GDP this fiscal year because of slowing revenues, exceeding the Finance Ministry’s goal of 5.3 percent, said Sonal Varma, an economist at Nomura Holdings Inc. in Mumbai.

Food costs and supply bottlenecks have stoked prices in a nation where more than two-thirds of people still live on less than $2 per day. That’s limited India’s room to join nations such as Brazil and the Philippines in further cutting borrowing costs as global growth falters.

Rate-Cut Calls

Reserve Bank of India Governor Duvvuri Subbarao on Oct. 30 resisted calls from Finance Minister Palaniappan Chidambaram for cheaper credit to spur investment, leaving the repurchase rate at 8 percent while cutting banks’ reserve requirements.

At the same time, the central bank signaled it may reduce rates next quarter if inflation eases. Subbarao has left the policy benchmark unchanged since a 50 basis-point cut in April.

The cost of credit has crimped spending. Sales of Hero MotoCorp Ltd. motorcycles fell in three of the past four months.

While Indian growth is subdued, it exceeds the pace in many advanced economies. Chidambaram has pledged to contain the fiscal deficit to boost scope to ease monetary policy.

The government also plans to set up a panel led by Singh to speed up approvals for road, rail and port construction, including as much as $18 billion of stalled projects, two officials with knowledge of the proposal said last week.

Goldman Sachs Group Inc. yesterday predicted the expansion in Asia’s No. 3 economy will accelerate to 6.5 percent in 2013, aided in part by better export prospects and the policy revamp.

“Further reforms on fiscal consolidation, financial liberalization and infrastructure growth will be needed to sustain an improvement in trend growth,” the company said.

India’s trade shortfall widened to a record $20.96 billion last month. Foreign direct investment fell 60 percent in the five months through August compared with a year earlier.

The International Monetary Fund on Oct. 9 forecast GDP will climb 4.9 percent in 2012, the least in a decade, adding the nation’s outlook is “unusually uncertain.”

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