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Jumping worm to keep state poll pitch warm

India's economy may have come out of the world's worst crisis in eight decades, but you should brace for a few more months of economic uncertainties.

india Updated: Jun 28, 2011 19:41 IST
HT Correspondent

India's economy may have come out of the world's worst crisis in eight decades, but you should brace for a few more months of economic uncertainties.

The government's bitter medicine to cure inflation has failed to keep the price worm down and cast side effects on growth. India's gross domestic product (GDP) grew by a respectable 8.5% for 2010-11 as a whole, but the last quarter (January to March) saw a staggering industrial slowdown, data released last month showed.

India's GDP grew 7.8% during January to March—the slowest pace in five quarters.

The latest figures show, India's factory output growth in April rose 6.3 %, less than half from last year's 13.1%, mirroring signs of an imminent industrial slowdown as rising input costs and costlier borrowing squeeze corporate profitability, forcing them to defer planned investments. Slower manufacturing sector growth will hurt corporate profitability.

Companies will seek to cut corners to stay afloat, as rising input costs and costlier borrowing have forced firms to defer planned investments.

A slower manufacturing sector growth will hurt corporate profitability and employment prospects in India's factories. While only 4% of the respondents to a survey felt that the economic development and industrialisation would be a key issue during the assembly elections in Uttar Pradesh next year, a high 19% or nearly 1 in every five persons were of the view that unemployment will be a major electoral issue.

It will also affect the government's tax revenue collections and finance minister Pranab Mukherjee said earlier this month that meeting the budgeted tax revenue targets would be a "challenge."

The Reserve Bank of India (RBI) has raised interest rates 10 times in the past 15 months. Though that could hurt growth – as the central bank itself admitted – RBI's idea is to reduce demand pressures on the economy in its battle against high inflation that hovers over the economy.

India's advance tax receipts grew at a slower 19% during the first quarter (April to June) of this fiscal year as compared to 33% last year—an indication that high interest rates and costlier inputs were hurting corporate profitability and income. Companies pay advance tax every quarter based on their projected income of the year and a slower growth in these reflects signs of weakening corporate income.

Economists say inflation can hit double digits again, repeating the spectre seen between February and July 2010. This means the RBI may go for a couple of more rate hikes. Abheek Barua, chief economist, HDFC Bank, said: "Pipeline pressures" on input prices, diesel and key government-controlled food items could bring back double-digit inflation by July-August. While inflation is a cause of concern, the RBI feels that rate hikes are not de-railing the growth momentum as yet, and is ready to face a pinch in economic expansion. And it is not only the manufacturing sector that is showing signs of slowing down. Across India, most services segments grew at a slower pace during January to March.

Financing, insurance, real estate and business service grew 9% during January to March compared with 6.3 % in the same quarter of the previous year Construction also grew at a slower 8.2% as compared with 9.2% in the last quarter of the previous year.

India's growth experience has been characterised by a sharp rise in the share of services in India's GDP. A sluggish services sector growth will hurt new employment prospects in several sectors such as financial services, real estate and information technology.