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Business News/ Politics / News/  GDP growth dips to 5.3% in third quarter
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GDP growth dips to 5.3% in third quarter

GDP growth dips to 5.3% in third quarter

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New Delhi: India’s economic growth slowed much more than expected in the December quarter, slumping to its weakest pace in almost six years and raising expectations the central bank would cut rates, possibly as soon as this weekend.

Both manufacturing and farm output in Asia’s third-biggest economy dropped from a year earlier and the data prompted a weak share market to extend losses to more than 2%, which in turn pushed the rupee to a record low.

India’s figures provide the latest evidence of the impact in Asia of the global financial crisis that has already forced Japan, Singapore and Hong Kong into recession and pushed Thailand and South Korea into economic contractions.

“We have been calling for significant rate cuts for a long time. We are looking for a 100 basis points cut as soon as probably tomorrow in the repo rate and reverse repo rate," said Sailesh Jha, senior regional economist at Barclays Capital.

“After seeing this number, I think the market is now pricing in a 100 basis points cut."

The economy in the December quarter grew by 5.3% from a year earlier, below forecasts of 6.2% and the previous quarter’s growth of 7.6%.

It marked the slowest growth since the March quarter of 2003, and while India is far from recession many analysts say growth is grinding down to level that threatens jobs and a rise in poverty, underlining the need for more action by policy makers to stimulate activity.

The central bank cut its main lending rate, the repo rate, by 350 basis points to 5.50% in four moves between 20 October and 2 January, but it held rates steady at a review in late January because banks were yet to pass on the full extent of its rate cuts.

Dismal data

India’s economy has lost altitude from growth rates of 9.0% or higher in the past three fiscal years, and economists said the government’s forecast of 7.1% growth in the 2008/09 fiscal year ending 31 March would not be met.

"The overly optimistic projection now needs to be revised downward," Moodys Economy.com economist Sherman Chan said.

"The sharper-than-expected deceleration in the December quarter perhaps makes up for the slowdown that should have taken place in the September quarter when the rest of the region began to show strong signs of fatigue," she said in a report.

But junior finance minister Pawan Kumar Bansal said the government still expected growth of around 7% in 2008/09, and had anticipated December quarter growth would be below market expectations.

Policy makers and analysts say India needs to sustain growth of 8 to 9% to make inroads against mass poverty and to promote employment in the country of more than a billion people.

If economic expansion slips below 6%, as some economists expect in 2009/10, it could lead to more unemployment.

The Labour Ministry has estimated about a half a million jobs were lost in the December quarter in small businesses, which account for more than 60% of economic activity.

Challenging Times

The manufacturing sector fell 0.2% in the October-December quarter from a year earlier.

The farm sector, which provides a livelihood for some 60% of Indians, contracted an annual 2.2%.

Analysts were surprised by the contraction in farm sector growth, with some expecting the numbers would eventually be revised up, but said the overall picture remained grim.

"Whatever the government is doing is not going to be very effective as large-scale demand stimulus world over has not proved to be effective in restoring business confidence," said Rupa Rege Nitsure, chief economist at Bank of Baroda in Mumbai.

"Eventually interest rates are going to come down but the Q1 and Q2 of fiscal year 2009/10 are going to be very challenging for India."

The government has taken a series of steps including sharp factory gate duty and service tax cuts, announced extra spending to boost demand and protect faltering growth, but policy makers admit that the full impact of the crisis is yet to unfold.

The Bombay stock market closed down 0.7%, as expectations for another rate cut lifted sentiment to raise prices from intraday lows.

The rupee though hit a record low of 51 per dollar.

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Published: 27 Feb 2009, 09:39 PM IST
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