GDP grows 6.1 pct in Q3, weakest in 3 years

NEW DELHI Wed Feb 29, 2012 8:13pm IST

1 of 2. Employees work inside a steel factory in Agartala, July 1, 2010.

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NEW DELHI (Reuters) - India's economic growth slowed to 6.1 percent in the three months to December, the weakest annual pace in almost three years, as high interest rates and rising raw material costs constrained investment and manufacturing.

The dismal numbers showed the weakness in the economy was spreading beyond industry, to the services sectors, and are certain to intensify pressure on the authorities to stimulate the flagging economy.

They make official forecast for 6.9 percent growth in the financial year ending in March look optimistic yet economists doubt much stimulus will be forthcoming as a fiscally constrained government focuses on finding money for fuel and food subsidies to win votes.

Rising oil prices may also push up inflation, making it harder for the central bank to cut rates quickly.

"Given the slippages we are seeing in agriculture and manufacturing sectors, it will be difficult for GDP to recover ground in January-March period," said Madan Sabnavis, chief economist at CARE Ratings in Mumbai.

The 6.1 percent rise in gross domestic product was lower than the consensus view in a Reuters poll of 6.4 percent. It was the seventh successive quarterly slowdown and marked a pullback from 6.9 percent growth in the quarter to end-September.

The manufacturing segment was at its weakest in 3 years at 0.4 percent growth, mining subtracted from output for a second quarter, while agriculture softened to a 2.7 percent annual pace.

The data provides a gloomy backdrop for a RBI policy meeting and federal budget, both due in just over two weeks.

Sabnavis said growth for the year could drop to between 6.5 and 7 percent, and yet the Reserve Bank of India would probably persist with measures to keep the banking system sufficiently liquid, rather than cutting policy rates.

"This is because inflation remains a focus and there is a danger that the inflation trajectory could be affected by the oil price surge," he said.

Markets barely reacted to the economic numbers. The yield on India's benchmark 10-year government bond rose 1 basis point to 8.2 percent after the data.

"The country has started attracting more headwinds in the form of gyration in crude oil prices. We should be prepared for worse numbers," said Rupa Rege Nitsure, chief economist at Bank of Baroda in Mumbai.

"It puts all the more responsibility on this year's budget to act on sorting out the policy logjam and revive investment sentiment."

Other data meanwhile showed the government had breached its fiscal deficit target for the fiscal year ending in March 2012 in January itself. The deficit from April 2011 to January 2012 was 4.3 trillion rupees, more than 105 percent of the 12-month target.

On the bright side, the government also looked set to bridge some of that shortfall by raising $2.5 billion through a sale of its stake in Oil and Natural Gas Corp (ONGC).

PRICEY OIL GETS IN THE WAY

Growth in Asian economies is expected to slow down further in the first quarter of calendar 2012, suggesting that India may feel more economic pain in the months ahead. China's January to March growth is forecast to drop for the fifth straight quarter.

Unlike most other Asian economies, India has struggled to beat down inflation, so the central bank has kept interest rates at a three-year high of 8.5 percent since October while policymakers elsewhere in the region were cutting rates.

India has also suffered a longer-term steady decline in growth owing to a lack of economic reform that resulted in weak investment. Average growth of 9.5 percent in the three years to 2007/08 slowed to 8.4 percent in the past two fiscal years and is widely expected to ease to about 7 percent in the current financial year ending March.

The Reserve Bank of India, which has asked the government to cut fiscal deficits to help rein in inflation, signalled last month it was ready to cut interest rates to try to stimulate the economy.

Indian consumer prices rose 7.65 percent in the year to January. That was higher than wholesale inflation but suggested some moderation in price pressures which could give the central bank room to cut interest rates.

But rising oil prices have emerged in recent weeks as a new concern for the RBI. The central bank will release the outcome of its policy review on March 15, a day before the government announces its budget.

Economists point to government policy paralysis, stubborn inflation and high interest rates as major reasons for the slowdown in investment.

Wednesday's data showed manufacturing barely grew at just 0.4 percent in the December quarter from a year earlier.

Annual car sales are likely to drop for the first time since 2002 in the year to March after January sales fell short of expectations. The farm sector grew 2.7 percent from a year earlier, the data showed.

TROUGH

Despite the gloom, some analysts argue the economy may have hit a trough in the December quarter owing to temporary disruptions and supply crunches in the mining industry. A jump in community and social services in the quarter also suggested government spending was on the rise.

Private surveys of the manufacturing sector also indicate a pick-up in sentiment. The HSBC manufacturing purchasing managers' index (PMI), compiled by Markit, jumped to an eight-month high in January.

Still, evidence of improving demand and investment has been hard to come by. Reliance Industries, India's biggest company by market value and an energy conglomerate, reported its first quarterly profit drop in more than two years.

Thermax Ltd., an energy and environment solutions provider which depends on orders from capacity expansion in core industrial sectors for its revenue, expects those revenues to decline in the first few quarters of the next fiscal year.

"Next year is going to be challenging for not only Thermax, but for entire capital goods industry," M.S. Unnikrishnan, Thermax's managing director, told analysts in a conference call this month.

Economists fear growth may languish below 7 percent in coming quarters as well, particularly if crude oil prices stay high. India imports nearly 80 percent of its oil needs, and oil accounts for nearly a third of the country's imports.

The central bank ran a 20-month interest rate tightening cycle until October to try to rein in inflation. Economists generally expect the RBI to cut its main policy rate by 100 basis points in 2012 from the current 8.5 percent.

(Editing by Vidya Ranganathan/Neil Fullick/Anna Willard)

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