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Q1 GDP Grows Lowest In 10 Yrs, But Worst May Be Over

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Poor showing by the manufacturing sector pulled down the GDP growth to 5.5 per cent in the first quarter, the decade's worst Q1 performance, prompting the government to press for quick decisions to boost investments. The previous low in the first quarter was registered in 2002-03 when the economy clocked a growth rate of 5.2 per cent. However low, the growth but was slightly better than expected, signalling the worst may be over for Asia's third largest economy and dashing investor hopes of an early rate cut.
Planning Commission Deputy Chairman Montek Singh Ahluwalia and Prime Minister's Economic Advisory Council (PMEAC) chairman C Rangarajan and other experts, feel that situation would improve during the course of 2012-13. Ahluwalia told TV channel ET Now that economic growth for the fourth quarter ending in March 2012 is likely to revised up from 5.3 per cent.

Prime Minister Manmohan Singh also strongly pitched for creating conducive climate to boost investment and economy (Read Article).

Blaming "lack of cohesive coordination" in domestic politics as one of the factors hampering growth rate, he said the government would make efforts to improve upon the growth performance of 6.5 per cent (in 2011-12) and create an environment conducive to growth of saving and domestic investments.
The growth rate in the first quarter (April-June), according to the data released by the government on 31 August, slipped to 5.5 per cent from 8 per cent in the corresponding period in the last fiscal, on account of flat growth in manufacturing, mining and quarrying sectors
 "...the decline of fixed investment is source of concern to the government. It emphasises once again the need to take quick decision to accelerate investment, especially removing all bottlenecks to investment in the manufacturing sector," finance minister P Chidambaram said.

The growth rate on the sequential basis, however, was marginally better than 5.3 per cent registered in the fourth quarter (January-March) of last financial year.

"After continuous reduction in the growth rate in successive quarters beginning in the fourth quarter of 2010-11, this is the first time when quarterly growth rate has exceeded the growth rate in the previous quarter," the minister said.

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 RBI and ratings agencies Fitch and Standard & Poor's, who threaten to downgrade India's sovereign ratings to junk.
Commenting on the GDP numbers, Ahluwalia said, "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-June quarter."

No Rates Move, Yet
Many G20 central banks have been moving to support growth, but Indian policy interest rates have come down just once in more than two years and are among the highest of big economies.

Some investors had been optimistic that a weak growth number would persuade the Reserve Bank of India (RBI) to cut borrowing costs at its September 17 review, but the slight uptick will bolster the bank's argument that stubborn inflation is its main concern.

"The RBI still maintains a hawkish bias and rate cuts still seem some way off," said Jonathan Cavenagh, a currency strategist at Westpac Bank in Singapore, who said data from across Asia suggested growth would remain subdued in the September quarter.

RBI Governor Duvvuri Subbarao this week said inflation remained too high and needed to fall further or risk more damage to the economy.

India's benchmark 10-year bond yield rose 3 basis points to 8.23 percent after the GDP data, while one- and five-year overnight index swap rates also rose, reflecting disappointment over hopes for rate cuts in September.

Singh's economic advisory panel this month cut its forecast to 6.7 percent for economic growth in the year to next March (2012/13), down from a previous forecast of 7.5-8 percent. The RBI predicts growth of 6.5 percent in the same period.

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 per cent during the quarter, the first of the 2012-13 fiscal year that runs to next March, while farm output rose 2.9 per cent.

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.
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.

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 meets on September 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.

But for all the gloom in recent months, plenty of companies and investors continue to bet on India's longer-term prospects, especially in sectors driven by domestic demand.

Net foreign institutional investment in Indian stocks and bonds has quadrupled this year to $16.7 billion, including nearly $4 billion since the start of July.

The Sensex is up 14 percent this year, making it one of the best performing major stock markets in Asia.

Budget Cuts?
Newly reappointed finance minister P. Chidambaram has vowed to revive an economy he steered through the 2008 credit crunch with tax cuts. The buzz on his return to the ministry helped a market rally, further fuelled by a flurry of minor policy moves.

Stung by S&P's warning India may become the first country in the BRICS group of big emerging markets to lose its investment grade rating, Chidambaram's ministry is also contemplating possible budget cuts later in the year.

More far-reaching economic reforms remain elusive, however, and the government is distracted by a scandal over the allocation of coalfields that has paralysed parliament.

Singh, the pilot of India's initial reforms as finance minister in the early 1990s, is committed to slashing budget-busting subsidies on diesel and other fuels but struggles to find a good time to make such a politically sensitive move.

A plan to allow foreign supermarkets to sell to India's 1.2 billion people is also bogged down by politics, with many in Singh's own party opposed to a policy they say will hurt small shopkeepers.

He has a window to implement unpopular economic policies after the parliament session finishes next week and before elections in Gujarat towards the end of the year, but a drought driving up farm aid casts doubt on that timetable.

India's manufacturing sector grew an annual 0.2 per cent during the quarter, the first of the 2012/13 fiscal year, while farm output rose 2.9 percent. Construction grew a surprisingly strong 10.9 percent while the financial services sector was up 10.8 percent, possibly a result of a 50 basis point rate cut made by the central bank in April.

Some economists expressed surprise that industrial figures were in positive territory because industrial output data has shown a series of contractions since March. India often steeply revises economic data, raising questions about its reliability.