India has underperformed in the manufacturing sector—though emerging as the world's sixth biggest auto manufacturer, and expanding production of smartphones. (Abhijit Bhatlekar/Mint)
India has underperformed in the manufacturing sector—though emerging as the world's sixth biggest auto manufacturer, and expanding production of smartphones. (Abhijit Bhatlekar/Mint)

Indian economy seen losing momentum ahead of Elections 2019

  • India's Q3 GDP growth seen slipping to 6.9% annually, the slowest in five quarters
  • RBI has cut its repo rate to 6.25%, changed its stance to 'neutral' to boost a economy amid weak inflation data

New Delhi: The Indian economy appeared to be losing momentum in the approach to the Lok Sabha elections that must be held by May, as a Reuters survey of economists forecast that GDP growth slipped to 6.9% annually in the October-December quarter (Q3).

If the Q3 GDP forecast proves accurate, India will post its slowest growth in five quarters, making it harder for Prime Minister Narendra Modi's Bharatiya Janata Party (BJP) to persuade voters that government policies were delivering economic success.

The gross domestic product (GDP) and the second advance estimates for the 2018/19 fiscal year ending in March will be released on Thursday around 1200 GMT.

Weaker domestic and external demand were key factors behind the economists expectations of sub-7% growth. India would still be growing faster than China's 6.4% growth in the same quarter, but its economy has decelerated from the more than two-year high of 8.2% growth posted in the April-June quarter (Q1).

The current GDP growth numbers may look respectable, but Modi faces a criticism that he has not done enough for the manufacturing sector and create enough jobs for millions of youth entering the jobs market every month.

Growing signs of weakness in India, most alarmingly the desperation of rural communities whose income have been hit by falling prices for farm produce, forced Modi earlier this month to increase state spending, and make direct cash transfers to farmers. That could marginally help GDP growth rates, but it will increase the government's debt.

This month, the Reserve Bank of India (RBI) cut its policy interest rate by 25 basis points to 6.25%, and changed its stance to "neutral" to boost a slowing economy as inflation has come down sharply.

One basis point is one-hundredth of a percentage point.

"The economic growth slowed in December quarter following weaker consumption as reflected by auto sales and slowdown in credit after a crisis in non-banking financial company sector," said A. Prasanna, chief economist at ICICI Securities Primary Dealership in Mumbai.

Prasanna said Q3 GDP growth could fall to as low as 6.4%.

Economic growth could suffer from a possible slowdown in state spending in the two months before the general elections.

But, Prasanna and other analysts still expected a pick up in coming quarters due to rising private investments and consumer demand, helped by lower interest rates and a fall in global oil prices.

Average industrial capacity utilisation during the four quarters that ended in September 2018 was about 74.5% although the new orders growth has moderated, according to the RBI estimates released earlier this month.

Year-on-year growth in the industrial output in November and December 2018 were low at 0.3% and 2.4%, compared to the average growth of 5.7% in the preceding seven months of 2018-19.

The country has underperformed in the manufacturing sector—though emerging as the world's sixth biggest auto manufacturer, and expanding production of smartphones.

Manufacturing's share of GDP has risen just 1.5% in last three years to stand at nearly 18%, and investors complain that higher taxes, lack of efficient infrastructure and regulatory red tape make India a difficult place to work.

Inflows of foreign direct investment has slowed, dropping 7% to $33.5 billion in the nine months between April and December 2018, reflecting investors concerns that Modi's business-friendly government faced a tough contest and whoever wins the election could have a hard time pressing forward with needed reforms.

"The government needs to focus on addressing issues related to land, labour tax, the policy regime related to infrastructure, and overall ease of doing business," Upasana Chachra, an economist at Morgan Stanley said in a note earlier this week.

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