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India Growth Holds Below 5% as Policy Logjam Hurts Economy

India Growth Holds Below 5% as Policy Logjam Hurts Singh Agenda
A cock stands on a battery cage as customers wait for kebabs from a food stall in the Old Delhi area of New Delhi. India’s expansion last quarter trailed neighbors from China to Indonesia and the Philippines, with the government’s economic record set to be tested in elections due by May 2014. Photographer: Brent Lewin/Bloomberg

India’s economy expanded less than 5 percent for a second straight quarter as Prime Minister Manmohan Singh struggled to revive investment, adding pressure for further government policy changes to spur growth. Stocks slid.

Gross domestic product rose 4.8 percent in January to March from a year earlier, up from a revised 4.7 percent the previous quarter, the Central Statistical Office said in New Delhi today. The report matched the median of 33 estimates in a Bloomberg News survey. GDP climbed a decade-low 5 percent in the 12 months ended March, below the 10-year average of about 8 percent.

Singh’s eight-month push to boost the economy has in recent weeks floundered as protests over alleged graft in government disrupted parliament, impeding bills seeking to lure foreign capital, simplify taxes and provide more land for industry. At the same time, a record current-account deficit is constraining Indian monetary easing as the global recovery falters.

“Growth is weak and I am skeptical about a sharp bounce-back anytime soon,” said Radhika Rao, an economist at DBS Bank Ltd. in Singapore. “The Reserve Bank of India will be cautious about retail inflation and the high current-account deficit.”

The S&P BSE Sensex index tumbled 2.3 percent, the most in 14 months. The rupee fell 0.2 percent to 56.505 per dollar, the weakest level since June last year. The yield on the 8.15 percent bond due June 2022 was little changed at 7.44 percent.

Interest Rates

The Reserve Bank will probably cut interest rates at most by 25 basis points in the rest of 2013 as the current-account gap weighs on the rupee, UBS AG said this week. The shortfall reached 6.7 percent of GDP in October to December.

The rupee is down about 4.8 percent this month, the most among 11 Asian currencies tracked by Bloomberg, threatening to stoke price pressures. Wholesale prices rose 4.89 percent in April from a year earlier, a 41-month low, while the consumer-inflation index climbed 9.39 percent.

Reserve Bank Governor Duvvuri Subbarao reduced interest rates in January, March and May by a combined 75 basis points to 7.25 percent as the government pared the budget deficit to tackle inflation. He signaled after the May 3 cut that the nation has almost no space left to ease further.

Finance Minister Palaniappan Chidambaram said after today’s report that he’s confident India can expand 6 percent or more in 2013-2014. The budget gap last fiscal year was 4.9 percent of GDP, he said in New Delhi, narrower than a February estimate of 5.2 percent.

Trailing China

India’s expansion last quarter trailed neighbors from China to Indonesia and the Philippines, while exceeding more subdued performance in advanced economies such as Europe and the U.S.

The government’s record is set to be tested in elections due by May 2014. Policy changes will slow after September this year as the vote nears, according to Nomura Holdings Inc.

Agricultural output rose 1.4 percent in the three months through March from a year earlier, today’s data showed. Manufacturing expanded 2.6 percent, while construction gained 4.4 percent. Mining fell 3.1 percent.

Singh is grappling with allegations that he has let corruption fester after separate probes led to the dismissals of the law and railways ministers.

Parliament ended two days early in May as opposition parties demanding the men’s resignations blocked proceedings.

Bills to reduce restrictions on foreign investment in the country’s pension and insurance industries, overhaul the 1894 colonial-era Land Acquisition Act and help implement a uniform goods and services tax to encourage commerce are stalled.

Subdued Investment

Capital-goods output, an indicator of spending on factories and machinery, fell for nine of the 12 months through March. Foreign direct investment slid about 21 percent to $36.9 billion last fiscal year compared with 2011-2012, government data shows.

The current-account gap was $32.6 billion in the quarter ended Dec. 31, on gold and oil imports and subdued exports.

The Reserve Bank has said the imbalance is the biggest risk to the $1.9 trillion economy. Subbarao said May 4 that any unwinding of “extraordinary quantitative easing” in advanced nations may affect the capital flows needed to finance it.

Singh began changes in September to spur growth and avert a credit-rating downgrade. The steps included liberalization in the retail and aviation industries, faster approvals for public works and cutting a levy on overseas buyers of local bonds.

Finance Ministry advisers forecast as much as 6.7 percent expansion in 2013-2014. Companies from Unilever to Etihad Airways PJSC recently announced plans to invest in India, wagering the spending power of 1.2 billion people will revive.

“Any turnaround in the weak economic momentum remains dependent on the government’s success in easing infrastructure bottlenecks and hastening further reforms,” said Rahul Bajoria, an economist at Barclays Plc in Singapore.

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