India's Jan-Mar qtr GDP growth rate dips to 9-year low of 5.3%

Agencies : Mumbai, Thu May 31 2012, 11:23 hrs

http://www.indianexpress.com/news/indias-janmar-qtr-gdp-growth-rate-dips-to-9year-low-of-5.3/956088/0

India's annual economic growth slumped in the January-March quarter to a nine-year low of 5.3 percent as the manufacturing sector contracted and a fall in the rupee to a record low suggests the economy remains under pressure in the current quarter.

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Anubhuti Sahay, an economist at Standard Chartered Bank in Mumbai said the data was shocking.

The growth rate was much lower than expected and was even below the lowest forecast in a poll that had produced a median of 6.1 percent from predictions ranging between 5.5 percent and 7.3 percent.

The data highlights the unusual degree of weakening of the country's economy, likely driven by poor investment and widening trade gap, said Dariusz Kowalczyk, an economist at Credit Agricole CIB in Hong Kong.

The data also poses a dilemma for policymakers, as they have no fiscal room to stimulate growth, while monetary easing scope is very narrow, at least for now, due to rebounding and high inflation.

The growth rate in the final quarter of India's fiscal year was the lowest since 3.6 percent in the January-March quarter of 2003, data shows.

The data showed that the manufacturing sector shrank 0.3 percent in the quarter compared with a year earlier. The farm sector grew 1.7 percent.

Gross domestic product (GDP) 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 8.5 percent.

The impact of the euro zone debt crisis, a lack of economic reforms and high interest rates dragged on India's growth throughout last year.

Before Thursday's data, private economists had cut forecasts for Asia's third-largest economy to between 6 percent and 6.5 percent for the fiscal year to March 2013. The government forecasts close to 7.5 percent.

The yield on India's benchmark 10-year government bonds are down 11 basis points so far on Thursday.

India's main stock index Sensex extended its declines after the data to 1.3 percent on the day.

A rate cut is a given now, Sahay said.

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.

The rupee has fallen in the face of global risk aversion over the euro zone debt crisis. But investors have raised a number of India-specific red flags as well, including a swelling current account, high government spending on subsidies such as oil and a rash of unpredictable regulations and tax as the coalition struggles to push through economic reforms.

Infrastructure output growth rate slows to 2.2%

Reflecting slowdown in the economy, the growth rate of eight infrastructure sectors slowed down to 2.2 per cent in April because of poor performance of crude oil, natural gas, petroleum refinery products and fertilisers.

The eight core sectors that also include coal, electricity, cement and finished steel, and have a weightage of 37.9 per cent in the Index of Industrial Production (IIP), had grown by 4.2 per cent in April 2011.

The cumulative growth rate of infrastructure industries during 2011-12 also slowed down to 4.4 per cent, from 6.6 per cent in 2010-11, according to the data released by the commerce and industry ministry today.

Natural gas and crude oil production contracted by 11.3 per cent and 1.3 per cent respectively during April.

Petroleum refinery products and fertiliser production shrunk 2.8 per cent and 9.3 per cent respectively during the month.

Coal, Steel and cement output grew by 3.8 per cent, 5.8 per cent and 8.6 per cent in April 2012. In the same month last year, coal output had grown 2.7 per cent, steel - 2.9 per cent and cement - 0.1 per cent.

However, electricity generation slowed down by 4.6 per cent, from 6.4 per cent in April 2011.

COMMENTARY:

RUPA REGE NITSURE, CHIEF ECONOMIST, BANK OF BARODA, MUMBAI

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. What we need now is a clear reforms agenda like the one adopted in 1991 with a clear focus. If the government doesn't step in now, India's sovereign ratings may be jeopardized.

The government has to address on a priority basis the subsidies, fiscal consolidation, the kind of delays that have slowed down the industrial investments, liberalization on FDI, etc. The RBI is unlikely to cut rates as inflation is still high. We are having a kind of stagflationary situation so RBI's rate cuts will not help as it will only spur consumption further by individuals with high disposable income, but do little to address the supply-side pressures that are fuelling inflation.

RADHIKA RAO, ECONOMIST, FORECAST PTE, SINGAPORE

Disappointing number though not entirely surprising in light of the persistently under weather manufacturing sector, weak investment sentiments and sluggish external sector. The authorities meanwhile will be in a bind in the face of mounting growth risks, while there is no leeway for fiscal accommodation at this juncture.

Stagflationary concerns could also return to fore as the recent rupee depreciation adds to inflation worries, even as the negative output gap tempers demand conditions. Faced by the twin challenges, RBI treads a fine balance yet again - we see room for 50 bps more cuts in the year, though a possible firm May inflation number could prod the central hold steady in mid-June after the recent aggressive cut in April.

RAHUL BAJORIA, REGIONAL ECONOMIST, BARCLAYS, SINGAPORE

Incrementally, the growth slowdown will probably take up more space in policy making and we expect RBI to continue with modest easing. I think after this data, market may come to a view of closer to 50-75 basis point rate cut in rest of the fiscal year, which is also our view, from 25 basis points factored in now.

RBI is fighting a multi-faceted battle - managing currency, supporting growth, fighting inflation. I think they will wait for fiscal consolidation before cutting rates further.

This number may be another data to fuel a bit more negativity on India in terms of the rupee movement, but we are not extremely bearish on India and still expect 7 percent growth in 2012/13.

SHUBHADA RAO, CHIEF ECONOMIST, YES BANK, MUMBAI

Clearly a huge negative surprise. Lowest recorded print in the new series. Concerns build up as services have slipped to close to 8 percent. Negative manufacturing was anticipated. This number points to a worrisome trajectory going forward as it is yet to take on board the impact of weaker rupee especially from Q1FY13. It may be difficult for RBI to ignore this number.

DARIUSZ KOWALCZYK, ECONOMIST, CREDIT AGRICOLE CIB, HONG KONG

The data highlight the unusual degree of weakening of the country's economy, likely driven by poor investment and widening trade gap.

The data also poses a dilemma for policy makers, as they have no fiscal room to stimulate growth, while monetary easing scope is very narrow, at least for now, due to rebounding and high inflation.

Further weakening of the INR could help a bit, but the key problem is lack of investment, caused by sub-optimal macroeconomic policy making and discouraging policies towards foreign investment.

We expect the INR to fall further, to fresh record lows, on the data. We also expect a decline in INR OIS, because decelerating growth will, at some point, help curb inflation, enabling some more monetary easing.

ANUBHUTI SAHAY, ECONOMIST, STANDARD CHARTERED BANK, MUMBAI

Shocking numbers as Q4 FY12 GDP growth was even lower than lows witnessed during the financial crisis. A rate cut is a given now. We expect a 25 bps reduction in repo rate on June 18.

SHAKTI SATAPATHY, FIXED INCOME STRATEGIST, A K CAPITAL, MUMBAI

The Q4 data was quite disappointing and reiterates a reflection of sluggish manufacturing data. However, the service output is showing resilience denying a further head down in the economy. Though the weak data and consistent global worries would keep the sentiment negative in the near term, we expect the June 18 (RBI) policy would primarily be a non-event in terms of rate cut.

SUJAN HAJRA, CHIEF ECONOMIST, ANAND RATHI SECURITIES, MUMBAI

Our sense is that growth will be subdued in the first half of the current fiscal year. However, if the government takes some positive steps immediately, we still think growth in 2012/13 will be better than 2011/12.

The Reserve Bank of India has already adopted pro-growth policy. But inflation is not softening, so it cannot do a significant rate cut. We think they will focus more on making liquidity surplus.

MARKET REACTION:

The benchmark BSE index slightly extended losses to 1.2 percent on the day. The 1-year swap rate fell 4 basis points to 7.85 percent from 7.89 percent before the GDP data.

Federal 10-year bond yields fell 10 basis points to 8.42 percent on the day, with bond prices having gained ahead of the data on expectations for a weak number.

The rupee recovered slightly, last at 56.39/40 to the dollar, after hitting a record low at 56.52 before the data.

BACKGROUND:

- India's economy, Asia's third-largest, is largely driven by domestic demand. The government has forecast economic growth at around 6.9 percent in the current fiscal year that started on April 1.

- Industrial output unexpectedly shrank an annual 3.5 percent in March for the first time in five months hit by weak investment, prompting increased pessimism among investors.

- The weak rupee - which has shed nearly 12 percent from its 2012 high - adds to policymakers' headaches by elevating import costs, most notably for crude oil that India buys for 80 percent of its consumption.

- High inflation, stoked in part by the falling rupee, leaves the central bank little room to cut interest rates further.

- The Reserve Bank of India last month delivered a larger-than-expected 50 basis point cut in benchmark rates but warned that it sees limited scope for more reductions.

- Factory growth picked up in April, helped by bulging order books, the HSBC-Markit purchasing managers' index shows, but the sector is not out of the woods yet.