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India’s world-beating economic growth cools as credit crunch hurts

Like elsewhere in Asia, growth in the country is coming off the boil as global demand wanes and trade tensions mount. While 7 percent-plus expansion still makes India a growth star, the more subdued outlook brings uncertainty to fiscal and monetary policy.

india Updated: Nov 30, 2018 20:55 IST
Indian economy,RBI,India GDP
India's GDP growth slowed down to 7% during the April-June quarter. (Reuters Photo)

India’s growth slowed last quarter as back-to-back interest rate hikes, a funding squeeze and weaker export demand put a brake on the world’s fastest-expanding economy.

After breaking through the eight percent mark in the quarter through June, growth eased to 7.1 percent in the three months through September. That compared with a median forecast of 7.5 percent in a Bloomberg survey of economists.

‘The numbers are a disappointment and it is well below consensus,’ said Hugo Erken, senior economist at Rabobank International. ‘This also means status quo on interest rates when the RBI meets next week.’

Key Details

Like elsewhere in Asia, growth in the country is coming off the boil as global demand wanes and trade tensions mount. While 7 percent-plus expansion still makes India a growth star, the more subdued outlook brings uncertainty to fiscal and monetary policy.

Budget goals may come under pressure if slower growth prompts Prime Minister Narendra Modi’s administration to boost spending before elections next year. It may also increase tension between the Reserve Bank of India and the government, which is trying to get Governor Urjit Patel and his team to do more to ease the credit crunch.

‘Based on the September quarter GDP growth and likelihood of lower growth in the second half of the year, chances of fiscal slippage are very high,’ said Devendra Kumar Pant, Chief Economist with India Ratings & Research, the local unit of Fitch. ‘The central bank is expected to stay on hold next week,’ he added.

A slew of high-frequency data between July and September, as well as Bloomberg News’ indicator of animal spirits, already pointed to subdued demand in the quarter. Growth in industrial production eased in each of the three months amid a surge in fuel costs, while automobile sales were subdued in the period.

Sectors like retail and real estate have been hit after debt defaults by a troubled financier forced many shadow banks to curtail lending when their own borrowing costs surged.

The more subdued growth outlook gives the central bank more reason to keep interest rates unchanged next week, as most economists expect. The Reserve Bank of India kept its benchmark rate unchanged at 6.5 percent in October as it lowered its growth projection for the first quarter of the 2020 fiscal year to 7.4 percent.

First Published: Nov 30, 2018 20:34 IST