Interest squeeze hurts GDP hard | india | Hindustan Times
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Interest squeeze hurts GDP hard

india Updated: Feb 08, 2012 01:51 IST
HT Correspondent

India’s real gross domestic product (GDP) growth in 2011-12 is likely to moderate to its lowest level since the global financial crisis hit home in 2008, down to 6.9% from the previous year’s 8.4%, government estimates showed on Tuesday.

The slowdown is mainly on account of a slower growth in manufacturing output, confirming fears of an industrial slowdown as rising input costs and costlier borrowings squeeze corporate profitability forcing firms to defer planned investments.

Falling industrial output, the slowest in nearly 10 years, has presented policy makers with a dilemma: the string of measures to cool prices hasn’t tamed inflation yet but eroded growth in the broader economy hurting employment prospects and investor sentiments.

Gross fixed capital formation, a proxy for investment activity, is set to slow down to 31.9% of GDP (at constant prices) compared with 32.5% last year.

Private consumption is estimated to moderate to 58.1% of GDP (at inflation-adjusted prices) against 58.7% in the last fiscal year — an indication that people are putting off planned purchases on account of high interest rates effected to tame inflation.

Experts said policy uncertainty have also slowed down growth.

“It is difficult to firmly to establish when the government’s policy inaction will reverse, but concrete action for investment upturn is still missing although the noise level and concerns have risen,” said Rajeev Malik, senior economist at Singapore-based CLSA.

“Within industry, mining output contracted due to policy uncertainty, while high rates and rising inflation hurt manufacturing and construction activity,” said Sonal Varma, economist at research firm Nomura.

Last month, the Reserve Bank of India (RBI) took steps to make more funds available with banks to lend, a move that may nudge them to reduce interest rates on loans to individual and corporate borrowers.

It had slashed the cash reserve ratio (CRR) — the proportion of deposits banks have to park with the central bank — by 0.50 percentage points to 5.5%. This will add R32,000 crore to the pool of resources that banks have to lend to final borrowers.

Finance minister Pranab Mukherjee found the data “disappointing” but said the figure would rise as business sentiments were improving and inflation was moderating.

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