India’s GDP Slows Down to 3-Year Low

on Nov 30, 2012

India expanded at the slowest pace in three years in the last quarter due to meagre growth in manufacturing and agriculture compounded by worse than expected exports and domestic spending.

The GDP of the 1.25 billion strong nation grew by 5.3 percent in the second-quarter of the Indian fiscal year in line with a forecast by a Bloomberg News Survey and down from 5.5 percent in the previous quarter. According to data from the Central Statistics Office in India, manufacturing growth rates went down from 4.1 percent to 1.8 percent, while agriculture expanded by just 1.2 percent. The GDP positives were the financing, insurance, real estate and business services at 9.4 percent and the construction sector at 6.7 percent.

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Last quarter was the third consecutive period in which the Indian economy expanded at less than 6 percent – a disappointing slowdown compared to earlier growth rates of 8 percent and more. “The near-term outlook remains challenging with sticky inflation, sluggish growth, high fiscal and current account deficits, and the rupee is weakening again,” Jyoti Narasimhan, India economist at IHS Global Insight, commented in a note on the release.

**Government Attempts to Cut the Deficit and Revive Investments**
Over the past few weeks Prime Minister Manmohan Singh and Finance Minister Palaniappan Chidambaram have pushed through reforms meant to attract foreign investments in key sectors of the economy. One of these policies allowed large overseas retailers, such as Wal-Mart, to set up supermarkets in India but only if the Indian subnational administrative unit, on which territory the store is to be built, gives its permission.

Foreign direct investment in the country fell by 60 percent to $8.17 billion (£5.1 billion) in the five months through August compared with the same period last year.
“While the recent reforms are a major positive first step, continued momentum in reform is essential to tackle India’s gaping fiscal deficit, financial sector weakness, stifling bureaucracy, power sector deficiencies and infrastructure shortfalls,” said Mr Narasimhan, as quoted by the FT. “Only then will India be able to raise its potential growth rate over the medium term.”

!m[Asia’s Third Biggest Economy Struggles to Attract Foreign Direct Investments](/uploads/story/938/thumbs/pic1_inline.png)Mr Chidambaram has pledged to maintain the fiscal deficit at below 5.3 percent of GDP at least until March 2013 in order to allow monetary easing policies in the future. Goldman Sachs this week predicted an expansion in the third-largest Asian economy of about 6.5 percent in 2013, aided by the reforms and better export numbers. In order to sustain higher rates of growth, the country will have to make further efforts on financial liberalisation, infrastructure growth and fiscal consolidation, according to the investment bank.
“Growth has most likely bottomed out,” opined Leif Eskesen, an economist at HSBC Holdings Plc in Singapore. “But a recovery in India is completely conditional on reforms.”
On Wednesday Moody’s issued a report saying that India’s investment grade sovereign rating remained stable. The outlook was justified by the economy’s structural strengths – high household savings rates and a competitive private sector.


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