GDP growth seen below 5% for longest spell since 2005:

 

Economic expansion is running at almost half the average annual pace of about 8% in the past decade. Photo: Bloomberg

New Delhi: India’s economic growth probably held below 5% for a fourth straight quarter, the longest stretch in data going back to 2005, as Prime Minister Manmohan Singh struggles to boost investment and tame elevated inflation.

Gross domestic product (GDP) rose 4.6% in July through September from a year earlier, compared with 4.4% in the prior quarter, according to the median of 25 estimates in a Bloomberg News survey ahead of a report due on 29 November.

Expansion may continue to struggle, with Goldman Sachs Group Inc. predicting last week that the central bank would further raise interest rates while the government faces pressure to curb spending and shrink the budget deficit. Exports have provided a bright spot following a drop in the rupee, cushioning factory output from moderating demand among India’s 1.2 billion people.

“Growth will remain in a low gear,” said Radhika Rao, an economist at DBS Bank Ltd in Singapore, referring to the second half of the fiscal year ending in March. “The odds of expenditure restraint are high as India has to prevent a credit- rating downgrade that would disrupt foreign investment.”

A reform-minded administration must emerge from general elections due by May for expansion to exceed 5% in the year ending March 2015, Rao said.

Rajan’s increases

Goldman Sachs expects Raghuram Rajan to raise the policy interest rate to 8.5% next year from 7.75%, adding to two increases of a combined 50 basis points since he became governor of the Reserve Bank of India (RBI) in September.

Finance minister P. Chidambaram, who has repeatedly said he’ll stick to deficit targets, will reduce planned outlays on items such as roads, ports and welfare programmes by about Rs.70,000 crore this fiscal year, according to Yes Bank Ltd. Chidambaram has pledged to narrow the deficit to a six-year low of 4.8% of GDP in the 12 months that began 1 April.

India’s credit rating may be cut to junk next year unless the general election leads to a government capable of reviving economic expansion, Standard & Poor’s said earlier this month.

Singh’s coalition, beset by graft scandals, has struggled to spur investment and ease supply bottlenecks that contribute to consumer-price inflation of 10%, the fastest in Asia.

Rupee steps

Economic expansion is running at almost half the average annual pace of about 8% in the past decade. Some 825 million Indians live on under $2 per day, World Bank data show.

Rajan, a former International Monetary Fund (IMF) chief economist, has offered concessional dollar swaps to banks to spur inflows of the US currency and bolster the rupee, whose weakness makes imports costlier. The rupee has appreciated about 10% since slumping to a record low in August.

Rajan said last month that he expects an improvement in India’s economic performance, partly on exports and a revival in major investment projects. Overseas sales rose in the four months through October, snapping declines, while factory output has increased for three straight months.

“Farm and industrial production will help the growth recovery in the second half of the fiscal year,” said Shubhada Rao, chief economist at Yes Bank in Mumbai.

Elsewhere in Asia, industrial production in Singapore probably gained 9.3% in October from a year earlier, according to a Bloomberg survey ahead of a report due today. Consumer confidence reports for November are due in Italy and the US

Lagging rivals

India’s expansion lags behind regional rivals from China to Indonesia, and the South Asian nation’s companies are grappling with conditions akin to stagflation.

China grew 7.8% last quarter and Indonesia 5.6%. Vehicle sales at India’s Tata Motors Ltd slid 28.1% in October from a year earlier, while a glut of office space in the big cities is pushing up vacancy rates, freezing development and prompting some builders to convert commercial projects into housing.

Singh has eased curbs on foreign investment to try and bolster growth before next year’s election. Opinion polls signal neither his Congress party nor the main opposition Bharatiya Janata Party, whose campaign is led by Gujarat chief minister Narendra Modi, will get a majority.

“An investment cycle requires certainty and I see that happening only after the elections,” said Dharmakirti Joshi, chief economist in Mumbai at Crisil Ltd, the Indian arm of S&P. BLOOMBERG

Manish Modi in New Delhi, Malcolm Scott in Sydney and Shamim Adam in Singapore contributed to this story.

 

Pratima Kumari.

PGDM 1st

source: Live mint