Slow Q2 as economy reels under credit crunch, high borrowings

Slow Q2 as economy reels under credit crunch, high borrowings

New Delhi: India’s economy expanded at the slowest pace in 15 quarters in the three months ended 30 September, reinforcing the case for the central bank to reduce borrowing costs to stoke growth and fend off collateral damage from the global financial crisis and the Mumbai terror attacks.

The economy grew 7.6% from a year earlier in the fiscal second quarter, compared with 9.3% a year ago and 7.9% in the preceding three months, official data released on Friday showed. The pace still exceeded economists’ expectations, reflected in a Reuters poll that had predicted the economy would expand 7.3% and a Bloomberg survey that pegged growth at 7.2%.

Also See Downward Curve (Graphic)

For the first half of the fiscal, the economy grew 7.8%,which finance minister P. Chidambaram said was “satisfactory and healthy" against the backdrop of a global slowdown.

Asia’s third largest economy grew at an average pace of 8.9% in the past four years, the fastest rate after China. But the economy is reeling under the combined assault of an acute credit crunch, borrowing costs that had risen to a seven-year high before September and fallout from the global financial storm.

A. Prasanna, an analyst with ICICI Securities Ltd, said the second quarter numbers are “clearly surprising on the upside". “However, one should remember that the data are backward-looking," he added. “Demand conditions, external as well as domestic, have worsened significantly since September." The growth figures were released two days after terrorists mounted an audacious attack on landmark buildings, including two prestigious hotels popular with business travellers, in Mumbai, the country’s financial capital. The attacks, which left at least 124 people dead, could scare off tourists and investors and hurt the economy further.

Abheek Barua, chief economist at HDFC Bank Ltd, said he expects the economy to grow 7.3% this year, with the rate falling to below 7% in the second half. He said the Mumbai attacks would dent investment sentiment. “It is the general tendency to claim that this will not have a lasting impact," Barua said. “But this time foreign nationals and top business hotels have been targeted. I think the terror strikes this time will have a fairly major impact on both portfolio as well as foreign direct investment inflows. This is the time investors come to India. A lot of them may be caught up in the terror attacks. This will affect the risk premium associated with India."

The Mumbai attacks had shut down the stock, bond and currency markets on Thursday. On Friday, the Bombay Stock Exchange’s benchmark index, the Sensex, rose 66 points to close at 9,092.72, calmed by the better-than-expected second-quarter growth rate.

Friday’s data showed that the farm sector grew at a lower-than-expected rate of 2.7%. Industry grew 6.1%, better than that suggested by the industrial production numbers, because of a robust construction sector performance. The services sector grew 9.6%, led by trade, hotel and transportation sectors.

Chidambaram expects the economy to grow between 7% and 8% during the current fiscal while the Reserve Bank of India, or RBI, has estimated the gross domestic product would grow 7.5-8% in 2008-09.

Economists say that a declining inflation rate will give RBI room to cut its policy rate further to stimulate credit growth and boost flagging growth. RBI has cut its benchmark rate by 1.5 percentage points and reduced the cash reserve ratio, or proportion of deposits that banks have to hold as a reserve with the central bank, to 5.5% from 9%.

“Going ahead, these GDP numbers at such low levels, along with inflation also coming off rapidly, this gives tremendous headroom for the RBI to manoeuvre monetary policy, so we are going to see aggressive rate cutting going forward,"said Rupa Rege Nitsure, chief economist at Bank of Baroda.

The inflation rate declined to 8.84% for the week ended 15 November from a 16-year high of 12.91% in August this year with the fears of a global recession driving down prices of crude oil and other commodities.

Robert Prior-Wandesforde, an economist at HSBC Holdings Plc. in Singapore, expects the RBI to cut the repo rate, at which the central bank injects money into the financial system, by 1.5 percentage points and the cash reserve ratio by 1 percentage point by April.

Reuters and PTI contributed to this story.