India’s Economic Growth Slows as Concerns Mount Over Outlook

(Bloomberg) -- India’s economy grew at a slower pace last quarter than expected, with risks to the outlook mounting and pressure building on the central bank to cut interest rates.

Gross domestic product rose 6.7% in the three months to June from a year earlier, the Statistics Ministry said Friday — the slowest pace in five quarters and below the central bank’s projection of 7.1% for the period. Growth weakened from 7.8% in the January-March quarter.

The data comes against the backdrop of rising economic risks, which have prompted some economists to downgrade their full-year projections and call on the central bank to begin cutting interest rates. The Reserve Bank of India has remained on hold for more than 18 months, concerned that high food prices will continue to push up inflation.

Last quarter’s growth was weighed down by a contraction in government spending ahead of the elections. Government consumption declined 0.2% in the quarter from a year ago, after gaining 0.9% in the previous three months. Separate fiscal data released Friday also showed a sharp contraction in capital expenditure in the run up to the six-week elections, which ended on June 1.

Upasna Bharadwaj, chief economist at Kotak Mahindra Bank Ltd. said the figures support her forecasts for 6.9% growth for the fiscal year through March 2025. The “likely fatigue in urban demand, private capital expenditure and pace of the global slowdown” will need to be closely watched, she said.

What Bloomberg Economics Says

The slump in India’s GDP expansion in the second quarter, steeper than anticipated by the Reserve Bank of India, is likely to prompt the central bank to tilt toward reviving growth. We expect the RBI to begin easing at its next review in October, especially as we forecast 3Q inflation to also undershoot the bank’s projection. The growth slowdown goes against the RBI’s assessment that the economy is holding up well, even as it has kept the policy repo rate at a highly-restrictive level. 

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Abhishek Gupta, India economist

There were some positive signals in the data, with growth in private consumption — which makes up about 60% of GDP — accelerating last quarter, and investment picking up. More recent indicators showed consumer sentiment is waning, though, a sign that urban spending may come under pressure, while rural spending recovers. 

“A good monsoon will give a further fillip to rural and therefore overall consumption,” India’s Chief Economic Adviser V Anantha Nageswaran told reporters in New Delhi on Friday. 

Sujan Hajra, chief economist at Anand Rathi Shares and Stock Brokers, said while the quarterly GDP growth rate was below expectations, the expansion for the full year will come close to their forecast of 7%.

“Despite this slowdown, the underlying data presents a positive outlook, with a notable increase in private consumption and a modest improvement in investment activity,” Hajra said. The figures may prompt the Reserve Bank of India to keep interest rates on hold for the rest of the year, he added.

--With assistance from Siddhartha Singh and Malavika Kaur Makol.

(Updates with GDP data starting from first paragraph)

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