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Edging Out Growth

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In a sign that loss of economic momentum may not be a temporary phenomenon, economic growth has declined for seven successive quarters. On Wednesday, figures from Central Statistical Office (CSO) showed that India's economic growth slowed to its weakest annual pace in almost three years in the three months to December, as high interest rates and rising input costs constrained investment and manufacturing.

GDP rose 6.1 per cent in October to December compared with a year earlier, a lower-than-expected increase, figures showed.

That marked a sharp pullback from 6.9 per cent growth in July to September, providing a gloomy backdrop for a Reserve Bank policy meeting and federal budget, both due in just over two weeks.

Economists said growth may languish below 7 per cent in coming quarters as well, particularly if crude oil prices stay high. India imports nearly 80 per cent of its oil needs, and oil accounts for nearly a third of the country's import

The median forecast of economists in a Reuters poll was for GDP to rise 6.4 per cent. The outcome of 6.1 per cent was the weakest in 11 quarters.

"Moderation in the manufacturing sector was likely the starkest as higher input prices and a sharp jump in borrowing costs depressed output," said Radhika Rao, an economist at Forecast in Singapore.

"The ball is in the government's court now to kick start policy reforms."

The falling growth rate may prompt the Reserve Bank to cut rates at its mid-quarterly policy review on March 15.

Finance Minister Pranab Mukherjee too is expected to announce steps to arrest contraction in growth in the Budget for 2012-13, to be presented in the Lok Sabha on March 16.

"There is of course, a deceleration of growth rate as far as this quarter GDP is concerned. We need to undertake reforms and speed up implementation of various programmes to revive growth (momentum)", said Govinda Rao, member of the Prime Minister's Economic Advisory Council (PMEAC).

According to the data released by Central Statistical Organisation (CSO), growth of the manufacturing sector during the quarter decelerated sharply to 0.4 per cent from 7.8 per cent during the same period a year ago. Farm sector output registered a growth 2.7 per cent, down from 11 per cent in Q3 of the last fiscal.

Mining and quarrying production contracted by 3.1 per cent during the quarter under review, as against a growth of 6.1 per cent in the corresponding period last fiscal.

The growth rate during April-December 2011-12 decelerated to 6.9 per cent from 8.1 per cent during the same period last fiscal.

"In such a situation, all policy levers should be used to drive a revival in the economy", said CII Director General Chandrajit Banerjee.

Assocham Secretary General DS Rawat demanded immediate action to bring down the interest rate to boost growth.

Banerjee pitched for reduction of interest rates and said efforts were also needed to speed up clearances of projects and expedite implementation of the manufacturing policy.

Further Slowdown?
The yield on India's benchmark 10-year government bond rose 1 basis point to 8.2 per cent after the data. The BSE Sensex and the rupee were little changed.

Growth in Asian economies is expected to slow down further in the first quarter of calendar 2012, suggesting that India may feel more economic pain in the months ahead. China's January to March growth is forecast to drop for the fifth straight quarter.

Unlike most other Asian economies, India has struggled to beat down inflation, so the central bank has kept interest rates at a three-year high since October while policymakers elsewhere in the region were cutting rates.

India has also suffered a longer-term steady decline in growth owing to a lack of economic reform that resulted in weak investment. Average growth of 9.5 per cent in the three years to 2007/08 slowed to 8.4 per cent in the past two fiscal years and is widely expected to ease to about 7 per cent in the current financial year ending March.

The Reserve Bank of India, which has asked the government to cut fiscal deficits to help rein in inflation, signalled last month it was ready to cut interest rates to try to stimulate the economy.

Indian consumer prices rose 7.65 per cent in the year to January. That was higher than wholesale inflation but suggested some moderation in price pressures which could give the central bank room to cut interest rates.

Still, rising oil prices are emerging as a concern for the RBI while Finance Minister Pranab Mukherjee, faced with a burgeoning fiscal deficit due in part to a huge subsidy bill, is not in a strong position to announce major stimulus measures.

The RBI will release the outcome of its policy review on March 15, a day before the government announces it budget.

Economists point to government policy paralysis, stubborn inflation and high interest rates as major reasons for the slowdown in investment.

Wednesday's data showed manufacturing barely grew at just 0.4 per cent in the December quarter from a year earlier. Annual car sales are likely to drop for the first time since 2002 in the year to March after January sales fell short of expectations.

The farm sector grew 2.7 per cent from a year earlier, the data showed.

Economists said growth may languish below 7 per cent in coming quarters as well, particularly if crude oil prices stay high. India imports nearly 80 per cent of its oil needs, and oil accounts for nearly a third of the country's imports.

The RBI ran a 20-month interest rate tightening cycle until October to try to rein in inflation. Economists generally expect the RBI to cut its main policy rate by 100 basis points in 2012 from the current 8.5 per cent.

(With Agencies)