August 30, 2013 3:03 pm

Grim GDP data add to India’s woes

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India’s economy slowed sharply in the three months to June piling further pressure on Prime Minister Manmohan Singh’s crisis-hit administration, as it struggles to find ways to support its plunging currency and reassure increasingly anxious foreign investors about its future growth.

Asia’s third-largest economy expanded by just 4.4 per cent compared with the same period in the previous year, from 4.8 per cent in the preceding three months. The figure was well below expectations and its worst performance since 2009, raising fresh doubts about government assurances that growth would pick up again later this year.

The grim figures only complicate further the predicament facing Mr Singh and Raghuram Rajan, incoming central bank governor, as they try to chart a path through the economic storm that has engulfed India and other major emerging markets in recent weeks.

It also underlines the rapid descent in India’s growth rate, which expanded at nearly 8 per cent just two years ago, even before the negative effects of recent monetary tightening steps have been felt.

“The measures the government and the Reserve Bank of India are taking to support the rupee are having the consequence of slowing down the economy and pushing back the promised recovery even further,” says Manishi Raychaudhuri, head of equity strategy for BNP Paribas in Asia.

BNP this week downgraded its Indian growth forecast for this financial year to 3.7 per cent, a level that would represent the country’s weakest expansion since its balance of payments crisis in the early 1990s.

“You will now see consumption slow down and investment slow down, too . . . and with 4.4 per cent in this quarter, it looks as if growth in the coming quarters could be even lower still,” Mr Raychaudhuri says.

Before the release of the GDP figures, Mr Singh made his most forceful intervention since the start of India’s currency crisis in late May, pledging to take “all possible steps” to cut the country’s current account deficit, the underlying cause of the rupee’s recent run of record falls.

Speaking to parliament, the prime minister said he would press for the introduction of fresh structural reforms to bolster growth, including politically contentious subsidy reductions and steps to raise foreign investment in the insurance and pensions sectors.

He blamed overreactions from currency investors for the rupee’s sharp depreciations, but admitted that domestic inaction had also contributed to the growing sense of anxiety gripping India’s financial markets.

Mr Singh also said he would do “whatever is necessary” to meet a fiscal deficit target of 4.8 per cent of GDP this year and appealed to India’s opposition parties to back new reform measures.

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“The easy reforms of the past have been done. We have the more difficult reforms to do,” he said, asking for support to pass pending legislation liberalising the insurance sector and also introducing long-awaited tax reforms.

Opposition leaders quickly rejected such advances, however, staging an angry walkout in parliament and criticising Mr Singh for repeatedly promising reforms that ultimately failed to materialise.

“It is a most disappointing, frustrating statement the prime minister has chosen to give,” said Yashwant Sinha, a former finance minister for the opposition Bharatiya Janata party. “He used words which have no meaning and he hasn’t said anything new.”

Indian shares closed up 1 per cent following Mr Singh’s speech, while the rupee regained some of the ground it lost earlier this week, but analysts remained unconvinced that either India or other affected emerging markets such as Turkey and Indonesia could now avoid further growth falls.

“The irony of all this panic is that countries like India really haven’t seen that big a shock yet,” says economist Kenneth Rogoff of Harvard University, referring to the outflow of capital that followed fears of an early reduction in the Federal Reserve quantitative easing programme.

“This really isn’t the same thing as China suddenly going to 4 per cent growth . . . But even what we have had just shows how vulnerable these countries are, especially the likes of Brazil and India, where it would be generous to say that political reforms have simply stalled.”

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