NEW DELHI India's economy began a feeble recovery in the first quarter of 2013, but weak private consumption, capital investment and slowing public spending offered little hope for a fast rebound in coming quarters.
Asia's third largest economy grew an expected 4.8 percent from a year earlier in the January-March quarter, slightly faster than an upwardly revised 4.7 percent growth in the previous three months, which was the lowest in fifteen quarters.
But the better headline GDP number was largely down to a statistical base effect rather than any substantial improvement in economy.
The data will offer scant relief to Prime Minister Manmohan Singh as his government heads into a busy election period dogged by graft scandals and criticism of its economic management.
Two quarters in a row of sub-5 percent expansion meant the economy recorded decade-low growth of 5 percent in the fiscal year 2012/13 (April-March), in line with an official forecast given in February.
"We don't see any dramatic turnaround soon," said Aninda Mitra, India Economist at Capital Economics in Singapore, who expected economic growth to range between 5-6 percent until next year.
This is disappointing for an economy that recorded 9 percent annual expansion until two years back and was widely expected to be one of the main drivers of the global economic recovery. It also poses a challenge for the octogenarian Singh to generate enough employment opportunities for a young, growing workforce.
In a sign of underlying weakness in the economy, April infrastructure output growth slowed down to 2.3 percent year-on-year from 3.2 percent expansion in March.
Infrastructure output measures items such as coal, oil, steel and electricity and accounts for 37.9 percent of India's industrial production, which grew just 1 percent in 2012/13 and was largely responsible for the overall growth slowdown.
WEAK INVESTMENTS, SLOWING SPENDING
Public spending growth slowed to an annual 0.6 percent during the quarter from 2.2 percent a quarter ago after Finance Minister P. Chidambaram slammed the brakes on public spending to retain India's investment-grade sovereign rating.
His belt-tightening helped New Delhi narrow the fiscal deficit to 4.9 percent of GDP in 2012/13, below a revised official estimate of 5.2 percent and much lower than 5.8 percent a year ago, government data showed on Friday.
But worryingly, growth in capital investment and private spending also slowed down.
Annual capital investment growth dropped to 3.4 percent in the March quarter from 4.5 percent year-on-year a quarter ago, in large part because of regulatory bottlenecks that hit investment in mining, roads, ports and power.
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Private spending grew an annual 3.8 percent during the quarter, slower than 4.2 percent year-on-year growth a quarter ago. Mitra of Capital Economics said private spending was likely to remain subdued so long as consumer confidence stays weak and people worry about rising prices.
"In this situation, the kick-up has to come from somewhere else," Mitra said. "We see a marginal kick-up to growth only from the lagged effect of monetary easing."
MONETARY EASING TO CONTINUE?
The Reserve Bank of India's (RBI) has cut its policy rate by a total of 75 basis points since January to spur economic recovery.
But the GDP data dampened market hopes for another interest rate cut at the central bank's policy review on June 17, sending the federal bond yield to a two-week-high of 7.49 percent. The 10-year bond ended the day flat at 7.44 percent.
Indian shares fell more than 2 percent and the Indian rupee hit its lowest level in 11 months as hopes for another rate cut faded next month.
The RBI has warned that upside risks to inflation and a high current account deficit have limited room for more monetary easing even though inflation is on a downward trajectory and economic growth remains weak.
"The central bank has been hawkish on inflation, and only if there is a sharper-than-expected decline in inflation can we see a little bit more aggression on part of the Reserve Bank of India," said D.K. Joshi, chief economist at CRISIL.
Singh's minority, coalition government has been weakened by a series of scandals linked to allocation of resources, including coal and telecoms. Opposition parties' attacks on the government have paralysed parliament, delaying legislation aimed at attracting funds to lift capital investment growth from an eight-year low. (Editing by Frank Jack Daniel and Ron Popeski)
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