New Delhi: Confirming a significant slowdown in growth momentum, the government’s statistics arm on Tuesday said the economy is expected to expand at the slowest pace in three years in the current fiscal year ending 31 March, due to the deceleration in both consumption and investment demand.

According to the advance estimates for the current fiscal year, India’s GDP is estimated at Rs 89.1 trillion compared with Rs 76.7 trillion a year ago.

This means the government expects growth to slow to 6.5% in the second half (October-March) of the year from the 7.3% expansion in the first half (April-September).

The relative stagnation in structural reforms, combined with a series of confidence-denting corruption scandals, have impeded capital spending—visible in slowing foreign direct investment flows and declining domestic business confidence. The external volatility arising from the deepening debt crisis in Europe has only added to the uncertainty.

Watch Video

The government estimates India will only grow 6.9% this fiscal. Mint’s Asit Ranjan Mishra talks about the outlook for the year and the chances for a revival.

Loading Video

Finance minister Pranab Mukherjee said the main reason for the slump in growth is the slowdown in industrial growth and investment in particular. He said that negative growth in the mining sector along with the slowdown in construction have also contributed to this.

“Though figures of advance estimates for GDP for the current fiscal look somewhat disappointing by our recent growth experience, yet considering the current global context and the slowdown in the domestic industrial sector in particular, the growth performance is not all that surprising,” Mukherjee added.

Beginning February, the Central Statistics Office (CSO) releases five sets of GDP data —advance, quick, provisional, revised and final estimates.

Mukherjee said the estimate may be revised upward once full-year data is available.

“There have been some encouraging signs in the recent weeks on business sentiment, rupee exchange rate, moderation in headline inflation, possibility of a bumper rabi crop and continued strong performance of the services sector, which should help in recovering the growth momentum,” he said.

Economists are divided whether the economy will revive next year or growth will further slow. Credit rating agency Standard and Poor’s said on Monday that it expects India’s economy to grow at 6.8% in the current fiscal year and 6.5% in the next. R. Gopalan, secretary, department of economic affairs in the finance ministry, last month told Mint that he expects growth to accelerate next year to 7.3%.

Samiran Chakraborty, head of India research at Standard Chartered Bank, said he expects a marginal pickup in growth next year due to the easing of interest rates, faster global economic recovery and a low base this year. He projects GDP growth of 7% for the current year and 7.4% in 2012-13.

Chakraborty said a monetary policy-driven recovery is possible within a year’s time. “Because investment growth has been flat for a long period of time, there will be a pent-up demand for investment. Once sentiments improve, you might see a lot of investment activity within a short period of time,” he added.

After effecting 13 rate hikes since March 2010 to cool persistently high inflation, the Reserve Bank of India (RBI) last month cut the cash reserve ratio, the amount banks need to park with it, by half a percentage point to 5.5%, while keeping policy rates unchanged. RBI has also revised the growth forecast for the current fiscal year to 7% from 7.6% projected earlier, holding that there could be a marginal recovery in growth next year.

However, it has cautioned that in the absence of credible fiscal consolidation, it will be constrained from lowering the policy rate in response to decelerating private consumption and investment spending. “The Union budget must exploit the opportunity to begin this process in a credible and sustainable way,” it said.

Mukherjee, who will present the annual budget on 16 March, will have the unenviable task of cutting the high fiscal deficit without hurting growth momentum.

Sudipto Mundle, emeritus professor at the National Institute of Public Finance and Policy, said although he expects a hastening of growth next year, it cannot be taken for granted. “Government has to bring down the high level of fiscal deficit. If the government shows signs of fiscal profligacy, then it may adversely impact investment sentiment,” he said.

In the current year, the impact of higher interest rates and poor sentiment saw overall consumption growth slowing to 6% from 8.1% in 2010-11. While growth in private consumption expenditure is expected to fall to 6.5% this year from 8.1% last year, government consumption expenditure is expected to slow at a faster pace to 3.9% from 7.8% a year ago. Growth in investment expenditure as represented by gross fixed capital formation is estimated at 5.6% this year against 7.6% a year ago.

Citi India economists Rohini Malkani and Anushka Shah said in a report released on Tuesday that the deceleration in consumption and investment appears to have hit the bottom. They expect growth to marginally pick up in 2012-13 to 7% from 6.9% estimated for this year.

“This is based on investments edging slightly higher. We hope the recent government resolve to fast-track projects (power/coal) is not a false start. On consumption, trends should likely stay at around 6%. While rural spending may be plateauing, a focus on ‘inclusive growth’ and lower rates may be offsets,” they said.

Citi also expects RBI to ease rates by 100 basis points this calendar year. “However, we reiterate our view that India needs concerted policy measures at all levels to support growth at 7% levels,” they said. One basis point is one-hundredth of a percentage point.

Chakraborty of Standard Chartered said the data showing investment demand picking up in the second half at 7.7% against 3.5% in the first half is mystifying. “This is contrary to the kinds of data we’re getting from other sources,” he added.

In terms of sectors, while lower growth in farm and industry is expected to pull down growth, robust growth in services, which contributes 59% to GDP, is providing support to the economy.

Per capita income at current prices in 2011-12 is estimated to be Rs 60,972 against Rs 53,331 in 2010-11, growing at 14.3%.

While agricultural growth is estimated to slow to 2.5%, mostly due to the base effect as it advanced at a robust 7% last year, mining is expected to contract 2.2% against a growth of 5% last year due to regulatory hurdles. Growth in manufacturing is expected to slump to 3.9% from 7.2% a year ago mostly due to the high cost of funds and low investment sentiment.

In services, the trade, hotels, transport and communications sector is pegged to grow at 11.2%, marginally above 11.1% last year, largely due to a 15.5% growth in air passenger traffic in April-November, CSO said.

It said 28% growth in phone connections and 19.2% growth in commercial vehicles in the first nine months (April-December) of the fiscal year also supported growth in the segment. The financing, insurance, real estate and business services sector is expected to grow 9.1% on account of 16.9% growth in aggregate deposits and 15.9% growth in bank credit in April-December. Growth in the community, social and personal services sector, which largely represents government spending, is estimated to pick up by 5.9% this year against 4.5% a year ago.

asit.m@livemint.com

Also See | Slow track (PDF)

PDF by Sandeep Bhatnagar/Mint