India predicts weakest growth since 2009 as pressure mounts for rate cut
2012-02-07 11:27:06
India’s government predicted the weakest economic expansion this year since 2009, adding pressure on the central bank to reduce interest rates.
Gross domestic product will probably rise 6.9 percent in the 12 months through March from a year earlier, the Central Statistical Office said in a statement in New Delhi today. The median of 15 estimates in a Bloomberg News survey was 7 percent. Asia’s third-largest economy expanded 8.4 percent in 2010-2011.
Growth has slowed after the Reserve Bank of India raised rates by a record amount from 2010 until October last year to fight price increases and as Europe’s debt crisis adds to the government’s struggle to spur foreign investment. The central bank has signaled readiness to follow nations from Brazil to Indonesia in lowering borrowing costs, provided inflation eases further from a two-year low of 7.47 percent in December.
“This number reaffirms the belief that growth drivers will remain subdued and suggests the RBI will cut rates in April,” said Radhika Rao, an economist at Forecast Pte in Singapore. “The reversal of RBI policy is on the way but will be guided by the fiscal deficit and the drop in inflation.”
The rupee, Asia’s worst performer last year with a 16 percent slide against the dollar, strengthened 0.5 percent to 48.8625 per dollar as of 12:49 p.m. local time. The BSE India Sensitive Index rose 0.1 percent. The yield on the 8.79 percent note due November 2021 was little changed at 8.19 percent.
Europe’s Impact
Asia-Pacific officials are striving to weather the impact of Europe’s debt turmoil on global growth. Expansion has eased in countries from China to South Korea, prompting central banks to cut rates or leave them unchanged. Australia today left borrowing costs on hold after two reductions last year.
Indian manufacturing may rise 3.9 percent in the current fiscal year, compared with 7.6 percent in 2010-2011, today’s report showed. Farm output may gain 2.5 percent and mining could fall 2.2 percent, according to the estimates.
India’s inflation in December remained the fastest in the so-called BRIC group that also includes Brazil, Russia and China.
The Reserve Bank on Jan. 24 cut the amount of deposits lenders need to set aside as reserves for the first time since 2009, seeking to ease a cash squeeze. It also said inflationary threats, including the budget deficit and the slide in the rupee, made it “premature” to start reducing rates.
Budget Deficit
At the same time, the monetary authority reinforced guidance that future rate actions “will be towards lowering them.” It kept the repurchase rate at 8.5 percent for a second month in January, following 375 basis points of increases in 13 moves from mid-March 2010.
The government is struggling to curb India’s budget deficit as a slowing economy hurts tax receipts and subsidies spur spending. The gap reached 92.3 percent of the fiscal-year target in the nine months through December. Standard Chartered Plc has predicted India will miss its goal of lowering the shortfall to 4.6 percent of gross domestic product by March.
“What India needs is a furthering of reforms to expand the capacity of the economy,” said Amol Agrawal, a Mumbai-based economist at STCI Primary Dealer Ltd. “Corruption charges and the reversal of policy initiatives have taken a toll on the growth story and are making foreign investors concerned.”
The Sensex slumped almost 25 percent in 2011, adding pressure on Prime Minister Manmohan Singh’s government to revive a legislative agenda derailed by corruption allegations and stalled moves to spur investment. The government in December suspended its decision to allow foreign retailers such as Wal- Mart Stores Inc. to open supermarkets following protests.
Singh is trying to preserve an economic turnaround that began in the 1990s, when as finance minister he helped engineer a shift toward free-market policies. Once the global economy stabilizes, India will return to 8.5 percent to 9 percent trend growth, he said in an interview in December.
“Concerns remain about the current political environment as both policy formulation and implementation have been hit,” said Anubhuti Sahay, a Mumbai-based economist at Standard Chartered. “There is an urgent need to revive the economy.”