India's GDP growth languished around its lowest in three years in the quarter that ended in June, offering no respite for Prime Minister Manmohan Singh as he struggles to escape a series of political scandals that have paralysed his economic agenda.
Weak demand in the West has hit exports, but the heaviest toll on the economy is from overspending and a lack of reforms at home - a point made by both the central bank and ratings agencies Fitch and Standard & Poor's, who threaten to downgrade India's sovereign ratings to junk.
The economy grew 5.5 percent in the quarter, government data showed on Friday, just above the 5.3 percent posted in the three-month period ending in March and slightly better than economists' expectations in a Reuters poll.
Some investors have been optimistic a weak growth number would persuade the central bank to lower interest rates at its Sept. 17 policy meeting, but the bank's recent comments remain hawkish in the face of stubbornly high inflation.
The RBI still maintains a hawkish bias and rate cuts are still seem some way off. Asian data momentum has not been great in Q3 so it is difficult to see a dramatic improvement in Q3, said Jonathan Cavenagh, a currency strategist at Westpac, Singapore.
The absence of a stronger rebound in growth is further bad news for the government, which is embroiled in a row with the main opposition Bharatiya Janata Party (BJP) over sweetheart coal deals. The state auditor has questioned the deals, and the BJP has refused to allow parliament to function until Singh quits.
A raft of bills, including a number of important economic reforms, is now bogged down in the legislature. The furore has deepened the sense of dysfunction in Indian politics that has already stalled bold measures to cut government spending on costly fuel subsidies and help bring down high inflation. Poor monsoon rains have added to the economic gloom.
The manufacturing sector grew an annual 0.2 percent during the quarter, the first of the 2012/13 fiscal year that runs to next March, while farm output rose 2.9 percent.
For now, Finance Minister P. Chidambaram is focused on small-bore measures he hopes will put the economy on track, and his ministry is also contemplating possible budget cuts later in the year.
The Reserve Bank of India (RBI) meets on Sept. 17 to review monetary policy and bond prices rallied earlier this week on expectations a low growth reading would pressure the bank to reduce interest rates, some of the highest among major economies.
But only last week the RBI said fighting inflation remained the cornerstone of its monetary policy, and said lower interest rates alone would not jumpstart the economy.
India's benchmark 10-year bond yield rose 3 basis points to 8.23 percent after the GDP data.
Bonds fall, rupee trims losses after April-June GDP
India's benchmark 10-year bonds fell, while the rupee and stocks trimmed earlier losses on Friday.
India's benchmark 10-year bond yield rose as much as 3 basis points to 8.23 percent from levels before the data, as faster GDP growth is expected to reduce expectations for interest rate cuts.
The rupee trimmed losses, trading at around 55.72 to the dollar from around 55.77 before the data was released.
India's benchmark BSE index and NSE index trimmed losses as well, and were down around 0.3 to 0.4 percent each.
India's 1-year OIS swap rose 3 bps to 7.78 percent, while the 5-year swap rates was up around 4 bps to 7.16 percent, according to traders.
COMMENTARY
SUJAN HAJRA, CHIEF ECONOMIST, ANAND RATHI SECURITIES, MUMBAI
We don't think that today's growth number will lead to any change in the Reserve Bank of India's monetary policy stance. It is unlikely that there will be a rate cut before the fourth quarter of the current fiscal year ending in March 2013.
Our growth estimate for the current fiscal year is 5.8 percent. We are seeing that slowdown in the manufacturing sector is percolating to the services sector. However, in the third and fourth quarter of the fiscal, there may be some improvement in industrial activity.
A PRASANNA, ECONOMIST, ICICI SECURITIES PRIMARY DEALERSHIP LTD, MUMBAI The industry numbers look much more higher than the IIP (index of industrial production) numbers, especially because these numbers track each other closely. But on balance this is a better number. I would think RBI would be reasonably happy with this number as it doesn't look as bad as they would have feared in July and most likely will keep rates unchanged next month.
RADHIKA RAO, ECONOMIST, FORECAST PTE, SINGAPORE
Sense of relief was palpable in the domestic financial markets after the stronger-than-expected Q2 GDP print. Whilst an upside surprise at 5.5 percent, the pace of growth is undeniably below potential and validates the need for the government to address sluggishness in investment and external sector activity.
Inflation remains sticky for the same reason that GDP is underweather - supply side constraints and structural bottlenecks. Thereby RBI action, we reckon, will be dictated by when the government gets its act together on the fiscal situation and ease structural constraints. We nonetheless still see reason to hold on to 50 bps rate cut by year-end, albeit might be deferred to Q1 2013.
NITESH RANJAN, ECONOMIST, UNION BANK OF INDIA, MUMBAI
GDP growth is a bit higher than our estimate of 5.4 percent, but there are no broad surprises except construction growth being in double digit and higher growth in agriculture The flat growth of manufacturing sector is presently the main worry; no doubt weakness in services is also getting extended.
Do not think that (fiscal) first-quarter GDP data will have any bearing on RBI's monetary policy stance for mid-quarter review. However, in our view, extent of dip in growth indicators is more likely to trigger a rate cut in future rather than inflation since price pressures do not seem to ease soon.
JONATHAN CAVENAGH, CURRENCY STRATEGIST, WESTPAC, SINGAPORE
Likely to take some of the heat out of USD/INR but only at the margin. The RBI still maintains a hawkish bias and rate cuts still seem some way off. Asian data momentum has not been great in Q3 so difficult to see a dramatic improvement in Q3.
RAHUL BAJORIA, REGIONAL ECONOMIST, BARCLAYS CAPITAL, SINGAPORE
There are some oddities in the number like if I look at the industrial production data, mining was negative and so was manufacturing, but that is not reflected in the GDP data and that's one source of the upside.
Also, construction number looks abnormally strong. On paper this looks good, but there is some scope of revision in the GDP data. For RBI, I guess it will possibly help them to explain their anti-inflation stance. But even if on relative basis the number looks good, overall it is still weak. If we look at the first half of 2012, growth is 5.4 percent compared with 6.4 percent in second half of 2011.
MARKET REACTION
- The benchmark 10-year bond yield rose as much as 3 basis points to 8.23 percent from levels before the data.
- The rupee trimmed losses, trading at around 55.72 to the dollar from around 55.77 before the data was released.
- The benchmark BSE index and NSE index trimmed losses, and were down around 0.3 to 0.4 percent each.
- The 1-year OIS swap rose 3 bps to 7.78 percent, while the 5-year swap rates was up around 4 bps to 7.16 percent, according to traders.
BACKGROUND
- India's economy would grow at 6.7 percent in the current fiscal year, less than an earlier estimate of 7.5-8.0 percent, Prime Minister Manmohan Singh's Economic Advisory Council said two weeks ago.
- The country's wholesale inflation unexpectedly dropped to near three-year low of 6.87 percent in July from 7.25 percent in June, while consumer price inflation slowed slightly to 9.86 percent from 10.02 percent.
- Earlier this week, the Reserve Bank of India (RBI) Governor Duvvuri Subbarao said inflation remained too high and needed to fall further or risk more damage to the economy, dismissing criticism of the bank's hawkish stance.
- The country's industrial output fell for the third time in four months in June, adding to pressure on new Finance Minister Palaniappan Chidambaram to move quickly and pull Asia's third-largest economy from its worst slowdown in almost a decade.
- The HSBC Purchasing Managers' Index for the services sector, which gauges the activity of hundreds of Indian companies, slipped to 54.2 in July from June's 54.3 while for manufacturing, the index fell to 52.9 in July from 55.0 in June -- its biggest one-month drop since September last year.
- India sharply revised its GDP data to show a much worse economic performance than originally thought in the aftermath of the global financial crisis, putting renewed scrutiny on the reliability of government data.
5.5 pc GDP growth 'good news', says Montek
(PTI) Terming the 5.5 per cent GDP growth as "good news", Planning Commission Deputy Chairman Montek Singh Ahluwalia today expressed confidence that economy would rebound in subsequent quarters.
"The good news is that the quarterly growth rate has gone up from the 5.3 per cent in the last quarter (January-March) of previous financial year to 5.5 per cent in April- une quarter," he said.
However, Ahluwalia added that marginal improvement in the GDP growth cannot be called "strong rebound". "I didn't think that we would get strong rebound in the first quarter".
The economic growth, he added, would improve in the second quarter. "We did expect the rebound, so let us hope that in the second quarter, especially in the third, you will get the rebound."
As per the provisional GDP data released by the government today, the economic growth in the first quarter (April-June) stood at 5.5 per cent. Although it was much lower than 8 per cent in the corresponding period last fiscal, the growth showed improvement on sequential basis. The growth rate in January-March was 5.3 per cent. On growth prospects in future, Ahluwalia said, "a lot will depend on what happens to investment in public and private sectors. Most likely in the second half of the year that investments will improve".
As regards the annual growth rate in 2012-13, he said, although Prime Minister's Economic Advisory Council (PMEAC) has projected 6.7 per cent, things would become clear by September 15.
Ahluwalia further said that growth figures for the last quarter (January-March 2011- 2) could be revised upwards on account of difference in the IIP data and corporate reports.
"The most important thing is that whether investment is picking up. I have seen some analysis which suggests that it is quite possible that the growth rate in the fourth quarter of last fiscal may get revised upwards because there is a difference between IIP and corporate data.
"We will get better idea of it only two or three months from now", Ahluwalia said.
Economic growth declines to 5.5 pc in April-June
PTI: Showing persistent sluggishness, economy grew by 5.5 per cent in the April-June quarter this fiscal due to poor performance of manufacturing, mining and farm sectors.
The gross domestic product (GDP) had expanded by 8 per cent in the April-June quarter of 2011-12.
During the quarter ended June 30, the manufacturing sector grew marginally by 0.2 per cent, against 7.3 per cent growth in the same period of 2011-12, according to the official data released today.
Mining and quarrying sector recorded a growth of 0.1 per cent during the quarter under review, as against a contraction of 0.2 per cent in Q1 of 2011-12.
Farm production expanded by 2.9 per cent in the first quarter against 3.7 per cent in the same period last year.
The trade, hotels, transport and communications segment also witnessed lower pace of growth at 4 per cent compared to 13.8 per cent expansion in the same quarter year-ago period.
The growth rate of electricity, gas and water supply also dipped to 6.3 per cent in Q1, from 8 per cent in the corresponding period last fiscal.
However, the growth in the construction sector was robust at 10.9 per cent during Q1 of 2012-13, as against 3.5 per cent in the year-ago period.
Growth rate of services sector, including insurance and real estate, also improved to 10.8 per cent in the first quarter, from 9.4 per cent recorded in April-June quarter last fiscal.
Economic growth in the January-March quarter was at nine-year low of 5.3 per cent, as the provisional estimate released earlier.
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