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Growth skids on liquidity squeeze

The country’s economy expanded 7.9% in the three-months ended June 30 amidst high inflation and sluggish industrial growth on the back of high borrowing costs.

business Updated: Aug 29, 2008 20:33 IST
HT Correspondent

The country’s economy expanded 7.9 per cent in the three-months ended June 30 — the slowest since 2004 — amidst high inflation and sluggish industrial growth on the back of high borrowing costs.

Latest official data released on Friday showed that most broad categories clocked slower growth, but the dip was most visible in the manufacturing sector that grew by 5.6 per cent — sharply down from last year’s sizzling growth of 10.9 per cent during the first quarter. Power generation growth also took fell severely to 2.6 per cent from last year’s 7.9 per cent growth during the quarter.

Finance Minister P Chidambaram was, however, upbeat about the broader economy’s stronger growth.

“I am confident that this year too, we will be more or less correct on our assessment of GDP growth, and the economy will grow close to eight per cent,” Chidambaram said in Mumbai. “Last year I was the only one who maintained that it would be close to nine per cent and eventually it turned out to be 9.1 per cent. I am confident this year also growth will be close to eight per cent.”

The stock markets reacted more to the US national income data that showed robust growth in the second quarter, rather than India’s gross domestic product (GDP) data that was on anticipated lines. Analysts attributed the poor growth to costlier capital that has forced companies to defer planned expansion projects.

“High interest rates consequent to the monetary tightening measures initiated by the RBI, subdued demand conditions and surging prices of raw materials have adversely impacted growth in the manufacturing and services sectors,” said Yashika Singh, Head, Economic Analysis of consulting firm Dun & Bradstreet.

The farm sector also grew by a slower 3 per cent as against last year’s 4.4 per cent, but construction activity expanded faster at 11.4 per cent against 7.7 per cent last year.

Most think-tanks including the prime minister’s Economic Advisory Council (EAC) have projected lower growth this year on account of a depressed global economy and high commodity prices.

The Reserve Bank of India (RBI) launched an all-round monetary attack on inflation by raising key interest and reserve rates and strongly indicated that price management would take precedence over growth if a trade-off were to be made.
The Indian economy has grown by over 9 per cent in the last three years.

Inflation has remained close to a worrisome 13 per cent during the past few weeks and the government and monetary authorities have taken a slew of steps since the rate began its upward march in February.

Despite these challenges, analysts were bullish on India’s long-run growth. “India’s economy is taking off, with accelerating GDP per capita; surging investment and saving rates. If India tackles its weak infrastructure, bureaucracy and inflexible labour market, our analysis suggests that it can lift its potential growth rate to 10,” investment banking firm Lehman Brothers said in a recent report.

Chidambaram said gross fixed capital formation and stocks show that there is high savings rate and high investment rate in the economy.