New Delhi: India’s economy grew at a slower-than-expected pace of 5.3% in the fiscal second quarter, raising concern that there is more pain in store for companies and consumers before a recovery kicks in.
Significantly, data released on Friday by the Central Statistics Office (CSO) showed that growth in public consumption in the three months ended 30 September was at a nearly 10-year low and investment activity subdued, an indication that the worst isn’t over yet.
The weaker-than-expected growth, which matched a three-year low, is likely to increase pressure on the Reserve Bank of India (RBI) to cut policy rates—a move it has resisted on the ground that inflation needs to slow. Inflation based on the Wholesale Price Index in October was 7.45%, above the central bank’s comfort zone.
Still, the financial markets shrugged aside the weak growth. Stocks rose to a 19-month high on optimism the government will extend an economic-policy overhaul to bolster investment. The BSE’s Sensitive Index, or Sensex, rose 0.9% to 19,339.90 at the close.
The rupee, down 3.8% versus the dollar in the past year, strengthened 1% to 54.265 per dollar. The yield on the 8.15% bond due June 2022 fell to 8.18% from 8.21% on Thursday.
Last week, finance minister P. Chidambaram said he had expected second-quarter growth to match the pace of the first. In a statement released after the release of the numbers on Friday, the finance ministry said economic expansion had fallen short of its expectations.
Economists said given the current weak investment climate, India’s gross domestic product growth (GDP) is likely to be around 5.5% in the current fiscal, down from 6.5% in the year ended 31 March. For the first half of the fiscal, GDP growth stands at 5.4%, compared with 7.3% in the year-ago period.
“What is worrying is that growth in private consumption is only 3.7%. This figure is almost at a decade low,” said D.K. Joshi, chief economist at rating company Crisil Ltd. “The slow pace is a reflection of high inflation and rising uncertainty among the consumers.”
Growth in gross fixed capital formation, a key indicator of investment activity in the economy, was 4% in the quarter against 5% in the year-ago period. Growth in the quarter ended 30 June was 0.65%.
“Though investment has seen a marginal pick-up, we do not know how durable it is,” Joshi said. “The impact of whatever steps the government has taken to revive investment will only be felt in 2013.”
Starting September, the government has allowed foreign direct investment (FDI) in multi-brand retail, opening the doors for foreign supermarket chains; raised the cap for investment in insurance; and allowed overseas airlines to buy stakes in domestic ones, among other measures.
The government also plans to set up a National Investment Board for faster clearance of large infrastructure projects.
In the July-September quarter, agriculture growth slowed to 1.2% from 3.1% a year ago, on account of delayed monsoon rains that water much of the country’s crops.
Industrial growth also slowed, led by manufacturing, which slumped to 0.8% from 2.9%. Services growth slowed to 7.2% with trade, hotels, transport and communication growing only 5.5% in the quarter, against 9.5% in the year-ago period.
Mining showed some pick-up and grew 1.9% in the second quarter compared with a 5.4% contraction in the year earlier. Growth in electricity, gas and water supply slowed to 3.4% from 9.8%, while construction picked up marginally to 6.7% from 6.3% a year earlier.
Citi India economist Rohini Malkani wrote in a research note that India’s GDP growth is likely to be 5.4% for the full year as an expected pick-up in industrial growth could be offset by the poor summer crop output.
“The first advance estimates on crop production indicate that rice, coarse cereals, pulses, and oilseeds are expected to decline by 6.5%, 18.4%, 14.5% and 9.6%, respectively,” Malkani wrote.
RBI, which ignored rate cut calls in its 30 October policy review, is unlikely to reduce rates in its mid-quarter review in December, economists said. The central bank has indicated that it would consider a rate reduction in the fiscal fourth quarter if economic conditions are conducive.
“The likelihood of a policy rate cut by RBI in December 2012 is low at present, given October’s policy statement,” said Aditi Nayar, senior economist at rating company Icra Ltd.
“Also, inflation based on the Wholesale Price Index for November is likely to accelerate as fuel and core inflation are expected to be high,” she said. “RBI may reduce the cash reserve ratio (CRR) by 25 basis points in December.”
A basis point is one-hundredth of a percentage point. CRR is the portion of deposits banks must maintain with the central bank. Reducing the ratio increases the amount of money that banks can lend to their customers.
Bloomberg contributed to this story.