India Growth Holds Below 5%, Adding Policy Overhaul Pressure

India’s economy grew less than 5 percent for a second quarter, adding pressure on Prime Minister Narendra Modi to spur investment after winning the strongest electoral mandate in 30 years.

Gross domestic product rose 4.6 percent in the three months ended March from a year earlier, unchanged from the previous quarter, the Central Statistical Office said in a statement in New Delhi today. The median of 42 estimates in a Bloomberg News survey was for a 4.7 percent gain. GDP expanded 4.7 percent in the full fiscal year, compared with the previous period’s decade-low 4.5 percent.

Reviving growth is the new government’s immediate challenge while the central bank works to lower inflation, Reserve Bank of India Governor Raghuram Rajan said in Tokyo today. The first single-party parliamentary majority in India since 1984 puts Modi in a position to take politically sensitive decisions such as cutting subsidies and hastening project approvals.

“The fact that the Modi government has come to power will have some upside to growth,” said Devika Mehndiratta, an economist with Australia & New Zealand Banking Group Ltd. “Their first priority will be implementing stalled projects, stay the course on fiscal consolidation and possibly even speed it up by subsidy reduction.”

The markets cheered Modi’s win, with the benchmark stock index rising to a record this month and the rupee strengthening the most in Asia. The currency lost 0.1 percent today to 59.1025 per dollar in Mumbai, the S&P BSE Sensex slipped 0.1 percent and the yield on the 10-year benchmark government bond fell to 8.65 percent from 8.67 percent.

Modi’s Challenges

More than $200 billion worth of infrastructure and industrial projects have been blocked as the previous Congress-led government dragged its feet on environmental and land acquisition clearances. Modi’s Bharatiya Janata Party faces the challenge of boosting investment while Rajan keeps borrowing costs elevated to suppress Asia’s second-fastest inflation.

Rajan will keep the benchmark repurchase rate unchanged at 8 percent after a June 3 review, according to all 34 economists in a Bloomberg survey. He raised borrowing costs three times since taking office in September.

Restoring investor confidence, curbing price pressures and fiscal consolidation are among the government’s focus areas, Finance Minister Arun Jaitley said on May 27.

Budget Deficit

Farm output rose 6.3 percent in the three months ended March from a year earlier and construction gained 0.7 percent, today’s data showed. Manufacturing output fell 1.4 percent and mining contracted 0.4 percent.

The budget deficit for the fiscal year ended March was 4.5 percent of GDP, smaller than the 4.6 percent target. In April, the first month of the new year, the gap was 21.5 percent of the official full-year goal, the Controller General of Accounts said on its website today.

Policy makers must work hard to make regulations more investor friendly, Rajan said in a speech at the Institute for Indian Economic Studies in Tokyo, adding that the central bank is committed to bringing down inflation and keep it low.

The monetary authority will raise borrowing costs towards the end of 2014 and possibly again early next year, according to Mizuho Bank Ltd. Morgan Stanley and Citigroup Inc. predict GDP will grow at a four-year high of 6.5 percent in the year through March 2016, faster than their previous forecasts of 6.2 percent. This is still lower than the past decade’s average of about 8 percent.

“Inflation will certainly come off the peak but it will remain sticky and still not of great comfort for the RBI,” said Vishnu Varathan, a senior economist at Mizuho Bank in Singapore. “So we are not pretending that we are going to 9 percent growth in a hurry.”

(An earlier version of this story was corrected to say growth held below 5 percent for a second quarter)

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