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Business News/ Politics / Policy/  GDP growth slows to 5.3% in September quarter
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GDP growth slows to 5.3% in September quarter

Manufacturing sector disappoints by growing just 0.1%; Apr-Oct fiscal deficit reaches 89.6% of full-year target

What crimped GDP growth in the quarter was a disappointing performance by the manufacturing sector, where output growth was little changed at 0.1%, compared to an expansion of 3.5% in the preceding. Photo: Pradeep Gaur/MintPremium
What crimped GDP growth in the quarter was a disappointing performance by the manufacturing sector, where output growth was little changed at 0.1%, compared to an expansion of 3.5% in the preceding. Photo: Pradeep Gaur/Mint

New Delhi: India’s economic growth slowed in the fiscal second quarter (Q2) as industrial output stagnated and investment demand remained tepid, data released on Friday showed.

Coupled with the recent decline in retail inflation and a drop in crude oil prices to the lowest in four years, the data is expected to increase pressure on the Reserve Bank of India (RBI) to cut interest rates at its monetary policy review meeting on Tuesday.

Gross domestic product (GDP)—the broadest measure of goods and services produced across the economy—grew 5.3% in the three months ended 30 September, against 5.7% in the previous three months, which was the highest in 10 quarters. Although slower than the pace of growth in fiscal Q1, it exceeded analyst forecasts of around 5% GDP growth.

The National Democratic Alliance government under Prime Minister Narendra Modi assumed charge in May with a pledge to revive economic growth, which slumped to sub-5% levels for two consecutive years. Finance minister Arun Jaitley has called for a cut in policy rates by the central bank to boost investment.

“The RBI should review its status-quoist approach and move towards paring interest rates in its forthcoming monetary policy to give a fillip to recovery both through higher consumption spending and opening up channels for investment," said Chandrajit Banerjee, director general of lobby group Confederation of Indian Industry (CII).

Those calling for a rate cut say the deceleration in inflation—the Consumer Price Index (CPI) rose 5.52% in October, the slowest since the gauge’s creation in January 2012—and the decline in crude oil prices to around $72 per barrel, the lowest since 2010, give RBI room to cut rates.

In the September quarter, agricultural output grew 3.2% despite an erratic monsoon, and mining production expanded 1.9%.

In the services sector, community services—representing government expenditure—and trade, hotels and transport grew 9.6% and 3.8%, respectively. Growth in financial services eased to 9.5% during Q2 from 10.4% in Q1.

Economic expansion in fiscal Q2 had been made possible by steady and high growth in the finance and government sectors, said CARE Ratings chief economist Madan Sabnavis.

“The comfort of the latter may not be available for the second half, given the high fiscal deficit recorded for April-October," Sabnavis said. “With the monsoon impacting kharif (autumn) harvest, support has to come from industry and other services, with the banking sector also expected to play a key role."

The central government had exhausted 89.6% of its fiscal deficit target for the year ending 31 March within the first seven months of the year to October, data released separately by the Controller General of Accounts showed. This compares with the five-year average of 74% in the period.

While in the near term, the government will aim to meet its 2014-15 target of 4.1% of GDP through austerity measures and cuts in Plan expenditure, fiscal consolidation over the longer term can only be achieved with structural reforms, Citigroup India economist Rohini Malkani wrote in a research note. The government wants to lower the fiscal deficit to 3% by 2016-17.

Reforms that are needed include implementation of the proposed goods and services tax, targeted cash transfers and expenditure rationalization, according to Malkani.

“For example, recent fuel price reforms and lower crude prices are likely to reduce fiscal deficit by ~(about) 0.5% of GDP. Overall, we expect government to make further progress in these areas when it announces its full budget in February, and continue on path of fiscal consolidation," she said.

In Q2, growth in gross capital formation, which represents investment demand in the economy, slowed significantly to 4.35% against 11.24% in the quarter ended June. Growth in private consumption decelerated to 10.92% compared with 12.03% in Q1.

The slowing growth will also increase the clamour for more reforms by the central government. Indian companies are keenly awaiting reforms on rules related to land acquisition, labour, the coal and power sectors, and foreign direct investment in insurance.

Putting in place an investor-friendly taxation regime and streamlining the procedure for land acquisition are two big challenges facing the government, finance minister Jaitley said at the Hindustan Times Leadership Summit earlier this month.

While the growth in agriculture and services sector is in line with expectations, the subdued growth in manufacturing is a matter of concern, said Sidharth Birla, president of lobby group Federation of Indian Chambers of Commerce and Industry (Ficci).

“Recent Ficci surveys show that despite positive business sentiment, investors are still cautious about expansion due to subdued demand conditions and limited improvement in capacity utilization levels," he added.

The government needs to persist with efforts to improve the tax and policy environment, Birla said.

“We are cognizant of government’s efforts to revive growth and believe that a real turnaround in investments should take place in 12-18 months," he said. “We look forward to further action on all the pending reforms including early introduction of goods and services tax, changes to the Land Acquisition Act and further reforms in labour laws."

CII’s Banerjee said the lower GDP growth in the September quarter does not alter the fact that the economy is on the road to recovery.

“This is borne out from the fact that the economy has notched up a growth of above 5% for the second consecutive quarter during the current year on the back of positive investor sentiment, indicating that recovery could be taking shape, albeit gradually," he said.

Since taking charge on 26 May, the Modi government has freed diesel prices and unveiled a new pricing formula for locally produced gas, and moved to open up sectors like defence production, insurance and railways wider to foreign investment.

It has moved to a process of auctioning natural resources like coal and initiated labour reforms to make it easier to do business in India—steps it hopes will revive growth.

The implementation of new reforms promised by the government will be key to putting India on a strong and sustainable growth path, said the latest economic survey of India released by the Organisation for Economic Co-operation and Development earlier this month.

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Published: 28 Nov 2014, 05:41 PM IST
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