India Posts Slowest Growth in Six Quarters

Output is up only 7.7%

As expansion was hit by the longest stretch of monetary tightening in a decade, India posted its slowest economic growth in six quarters on August 30, with output up 7.7% year-on-year.

The figure for March-June slightly outpaced market expectations but was just below the 7.8% expansion logged in the previous quarter and sharply down from the 8.8% a year earlier, India's statistics bureau reported.

Finance Minister Pranab Mukherjee called the data "disappointing" but said he was confident that growth would be "much better" from October, adding that Asia's third-largest economy was continuing to create jobs.

Underscoring the slowdown, manufacturing growth fell to 7.2% during the quarter from 10.6% in the same period last year, the new data showed. Construction growth plunged to 1.2% growth from 7.7% a year earlier while mining also slid.

But the growth in the important services sector edged higher to 12.8%.

The data followed a survey by the Federation of Indian Chambers of Commerce and Industry on August 30 which showed business confidence at a two-year low. The survey reflected "growing apprehensions about the world economy entering into another recession" while at the domestic level, rising interest costs and weak domestic demand "are taking their toll," the business group said.

Most economists forecast another 25 basis point rate hike in September by India's central bank, which has already raised rates 11 times in 18 months as it struggles to rein in inflation, now near 10%. "India has raised rates much faster than any other major country but inflation is also a bigger problem than in any other major economy," said D.K. Joshi, chief economist at leading Indian rating agency Crisil. He forecast another quarter point hike by the bank next month that would lift its benchmark lending rate to around a three-year high of 8.25%. The central bank has said it is unwilling to accept high inflation as "the new normal" and last week warned of "a difficult year."

The higher rates have made borrowing for everything from cars to consumer appliances to plant equipment more expensive, and slowed investment and consumer demand. The decelerating economy and high inflation come as another headache for the besieged Congress-led government. It is already battling a slew of corruption scandals that have triggered huge anti-graft protests and stalled ambitious economic reforms which economists say are a key to spurring growth.

The central bank expects expansion of 8% this fiscal year to March 2012, but has warned growth could be lower. Economic growth accelerated by 8.5% the previous year. Some economists expect growth this year in the 7% percent range. While that appears to be rapid compared with sluggish Western growth, economists say a slowing economy will undermine government efforts to tackle India's endemic poverty.

Copyright Agence France-Presse, 2011

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