India's Economic Growth Slows - Nichols & Meyer Report

Dec. 5, 2011 - PRLog -- The Indian economy grew at its lowest rate in more than two years in the quarter ended in September, hurt by high local borrowing costs and a deepening euro-zone crisis, sparking growth concerns that could lead to an early change in the central bank's tight monetary stance. Chandrajit Banerjee, director-general of the Confederation of Indian Industry, said corporate India is “extremely concerned” about the country’s economic growth trajectory. He warned that a pullback in investments and high borrowing costs threatened to curb India’s fast-growing economy further in coming months. Gross domestic product grew 6.9% from a year earlier, the government said Wednesday. Weakness in the second quarter was broad-based. Manufacturing, accounting for 16 percent of GDP, grew at only 2.7 percent and mining contracted 2.9 percent. Economists suspected the pace of economic growth may languish at seven percent in the coming quarters, and that even if the central bank isn't willing to cut interest rates, it might feel compelled to ease monetary conditions by other means.

The overall economy has been hit by a confluence of factors. Inflation has been persistently high all year, policy inertia has hurt investment and industrial output, and now capital outflows have pushed the rupee to new lows. The latest GDP figures marked the slowest rate of expansion since the second quarter of 2009, when India and the global economy started to recover from the 2008 financial crisis, thanks to monetary and fiscal stimulus. Since March 2010, the Reserve Bank of India began to raise interest rates to prevent the economy from overheating. After 13 rate hikes, however, signs of a slowdown have started to appear this year, just as the global economy is beginning to falter again and the crisis in the euro zone has curbed global investments.

The reading was in line with the median estimate in a poll of 19 economists, but was lower than the 7.7% increase in the April-June quarter as manufacturing slowed sharply and mining output fell. Last month, India’s central bank reduced its growth forecast for the year ending in March to 7.6% from 8%, citing the impact of its own monetary tightening and the weakening growth momentum in the U.S. and the euro zone. Chief Economic Adviser Kaushik Basu said growth in the October-December quarter would also be weak, although it will pick up in the January-March period. High inflation has weakened demand and prompted the central bank to hike interest rates 13 times, crimping growth as a dour global economy squeezes credit and exports. Policy inertia and corruption scandals have also slowed the flow of crucial investment and helped push the rupee to record lows. While investors have called for economic reforms - such as making land acquisition for industry easier and opening up the retail market to foreign firms - there appear to be few short-term fixes. Europe's sovereign debt crisis has also prompted European banks — which provide some $150 billion, or over 50 percent, of foreign currency loans to Indian companies— to pull back, making it harder to fund expansion.

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