NEW DELHI (Reuters) - India’s economic growth slumped to its lowest level in nine years in the first three months of 2012, marking a dramatic slide in the fortunes of a country whose economy boasted nearly double-digit growth before the global recession.
“Urgent and bold steps are immediately needed to prevent the economy from descending into a full blown crisis. This must be averted at all costs,” said Rajiv Kumar, secretary-general of the Federation of Indian Chambers of Commerce and Industry.
The economy grew 5.3 percent in the last quarter from a year earlier, a sharp slowdown from 9.2 percent growth in the last quarter of the previous year, government data showed. The figures were the latest confirmation that the slowdown of Asia’s third-biggest economy is deepening.
Finance Minister Pranab Mukherjee blamed the weak data on the poor performance of the manufacturing sector, which shrank 0.3 percent from a year earlier, and promised to take “all necessary steps” to trim the country’s ballooning budget and current account deficits, which are a major drag on growth.
The data was released as the rupee plunged to yet another record low. Adding to a sense of crisis, a general strike called by opposition parties to protest a steep petrol price hike shut down government offices and shops and stalled trains and buses in some of the country’s 28 states.
The poor growth figures will add to mounting pressure on Prime Minister Manmohan Singh’s government to act more decisively and with greater speed to arrest the economy’s slide.
“This is definitely a very important signal for the government - this is a make or break situation for India and the government has to step on the panic button,” said Rupa Rege Nitsure, chief economist at Bank of Baroda in Mumbai.
“If the government doesn’t step in now, India’s sovereign ratings may be jeopardised.”
The government later announced steps to curb spending, including some cuts to discretionary expenditure, restrictions on foreign travel and the creation of new government posts. It did not spell out how much the measures would actually save and some economists saw the move as largely a symbolic gesture.
The government largely blames factors beyond its control, such as the euro zone debt crisis, for its economic woes. But many economists and investors say weak leadership and muddled policies have failed to curb government spending and alienated many foreign investors.
Slowing corporate investment, stubbornly high inflation and high fiscal and trade deficits have led to comparisons with India’s 1991 balance of payments crisis, a watershed moment in the country’s history that led Singh, then finance minister, to drive through transformational economic reforms.
Critics of Singh’s fractious Congress party-led coalition government say it needs a crisis to break the policy paralysis that has stalled major reforms, such as allowing foreign supermarkets into the retail sector and reducing costly fuel, food and fertiliser subsidies.
For graphic on India GDP, industrial output, exports click link.reuters.com/qaw46s
But Thursday’s nationwide strike called by opposition parties to protest the petrol price hike underscored the difficulty the government faces in pushing through unpopular economic reforms. The petrol price was increased last week after a six-month freeze.
The strike forced businesses, public transport, government offices and colleges to shut down in parts of the country. Mumbai, India’s financial capital, appeared hardest hit. The usually bustling city looked deserted as people stayed at home and many shops remained closed.
Protesters in some states pelted buses with stones and set others on fire. Police made hundreds of arrests. Most of the country’s jewellery shops and major wholesale markets did not open.
The 5.3 percent growth rate was much weaker than expected and was even below the lowest forecast in a Reuters poll that had produced a median of 6.1 percent from predictions ranging between 5.5 percent and 7.3 percent.
Quarterly expansion was last lower in the January-March quarter of 2003 at 3.6 percent, Thomson Reuters data showed.
(Also read Expert Views on GDP Data, click here)
The GDP data showed that the manufacturing sector shrank 0.3 percent compared with a year earlier. The farm sector grew just 1.7 percent.
Gross domestic product rose 6.5 percent in the fiscal year to the end of March 2012, the lowest growth rate since 4.0 percent in 2002/03 and a sharp slowdown from the previous year’s 8.4 percent.
In the three years before the global financial crisis, India’s economy was roaring with growth of well above 9 percent, fuelling ambitions to challenge China as the world’s top emerging economy.
Indian benchmark 10-year government bond yields dropped 16 basis points as investors started to price in an interest rate cut to help the economy. The BSE Sensex was down about 0.6 percent.
Standard & Poor’s cut India’s credit rating outlook in April to negative from stable, worried by India’s fiscal and current account deficits. The decision jeopardises India’s long-term rating of BBB-, the lowest investment grade rating.
Mukherjee said on Thursday most of the factors that had led to India’s growth slowdown had “bottomed out”.
Private economists have cut growth forecasts to between 6 percent and 6.5 percent for the current fiscal year to March 2013. The government forecasts close to 7.5 percent.
The rupee fell on Thursday to a record low beyond 56.50 per dollar. Its slide of 14 percent from its 2012 high adds to inflation concerns in the country and raises the cost of imports.
Additional reporting by Annie Banerji, Satarupa Bhattacharjya and Arup Roychoudhury in New Delhi, Sujoy Dhar in Kolkata, Ashok Pahalwan in Jammu,; Shilpa Jamkhandikar, Vivek Prakash, Rafael Nam, Rajendra Jadhav and Kaustubh Kulkarni in Mumbai,; Mohammed Shafeeq in Hyderabad, Sanjay Pandey in Ahmedabad, Sharat Pradhan in Lucknow; Writing by Ross Colvin; Editing by John Chalmers, Neil Fullick and Catherine Evans