India’s Growth Slows More Than Estimated, Adding Pressure on RBI

India’s economy slowed more than estimated, adding pressure on incoming central bank governor Urjit Patel to cut interest rates and stimulate investment.

Key Points

  • Gross domestic product rose 7.1 percent in April-June from a year earlier, the Statistics Ministry said in a statement on Wednesday
  • This is the slowest pace in more than a year and weaker than the 7.6 percent median estimate in a Bloomberg survey of 36 economists
  • The slowdown was led by an easing in private consumption, which had been the main driver of Asia’s No. 3 economy
  • Gross value added, a key input of GDP that’s tracked by the central bank, rose 7.3 percent, matching the survey prediction

Big Picture

India still retains its spot as the world’s fastest-growing big economy, and the outlook has brightened after Prime Minister Narendra Modi in August broke a parliamentary logjam and paved the way for a landmark national sales tax. Consumption is forecast to increase following a pay hike for federal employees and a revival in the July-September monsoon rains that are key to rural incomes. The risk, however, is that rampant purchasing can stoke inflation -- already higher than the central bank’s target -- if sluggish investment damps supplies of goods and services.

Economist Takeaways

  • “These numbers are disappointing and it is perplexing to see a contraction in mining and slower expansion in construction," said Shubhada Rao, an economist with Yes Bank Ltd. in Mumbai. "The investment momentum is not forthcoming and government-led capex is yet to manifest in numbers. We are looking at one rate cut in the October-December quarter.”
  • "Growth of over 7 percent is still impressive, and would mean that India’s economy continues to expand at close to the rates it managed during the boom years between 2006 and 2011," Shilan Shah, an economist at Capital Economics, wrote in a report. "This is scarcely believable, particularly when we try to align the GDP data with other indicators of activity."

The Details

  • Agriculture GVA grew 1.8 percent in April-June, slowing from 2.6 percent the previous year; mining contracted 0.4 percent versus an 8.5 percent expansion; manufacturing rose 9.1 percent versus 7.3 percent and construction grew 1.5 percent versus 5.6 percent 
  • The Reserve Bank of India, which doesn’t provide a GDP forecast, sees India’s GVA rising 7.6 percent this fiscal year
  • Private consumption rose about 7 percent; government spending surged 19 percent; fixed capital formation -- that is creation of productive assets such as factories -- fell 3 percent
  • GDP is estimated to grow 7.7 percent in the year through March 2017, according to a Bloomberg survey published this month, in line with the government’s forecast of as much as 7.75 percent growth
  • Governor Raghuram Rajan left the benchmark repurchase rate at a five-year low of 6.5 percent this month and flagged upside risks to his 5 percent inflation target for March
  • Rajan’s term ends Sept. 4 and his successor Patel will hold his first review a month later
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