beyondbrics

The new normal is here. India’s economy grew by 6.9 per cent in the quarter ending in September compared with the same quarter last year, the slowest rate in more than two years, the ministry for statistics said on Wednesday. The rate fell from 7.7 per cent in the previous quarter.

The slowdown was no great surprise, now – though it would have come as a mighty shock back in April, when growth for the fiscal year ending March 2012 was expected to come in at 9 per cent.

The latest quarter’s fall was driven largely by a sharp decline in the rate of growth of manufacturing output, to 2.7 per cent for the quarter compared with 7.8 per cent in the same quarter last year.

Mining activities actually contracted by 2.9 per cent, down from 8 per cent growth a year ago.

Many economists who had expected growth for the year of between 7 and 7.5 per cent are now revising their estimates downwards.

The Reserve Bank of India’s most recent estimate for this fiscal year was 7.6 per cent but on Wednesday Pranab Mukherjee, finance minister, told reporters he expected growth for the fiscal year ending in March 2012 to be 7.3 per cent, far below the government’s outlook at the beginning of the year. The economy grew by 8.5 per cent in the previous year.

“It appears that it will be very difficult to achieve [the RBI’s estimate],” said A Prasanna, economist at ICICI Securities. “One would expect that this kind of slowdown or whatever we’re seeing in this data will continue into the next quarter also because the momentum” will be difficult to arrest.

“I still think the [annual] numbers will be above 7 per cent,” he added. “But maybe just above 7 per cent.”

As analysts told beyondbrics this week, the lower GDP growth rate is part of a “new normal” that India now faces, featuring high inflation, a weak rupee, a widening trade deficit, low manufacturing production and a slower growth rate.

The RBI’s hawkish monetary policy – it has raised rates 13 times since March 2010 even as other developing countries began cutting theirs – has come under fire. Economists now say that, if nothing else, a sub-7 per cent GDP growth rate might convince the bank to pause its tightening cycle or even reverse it.

After escaping the 2008-09 financial crisis relatively unscathed in comparison to Western economies, India is finding that global headwinds – which have been driving out foreign investors – and a weakening domestic economy are catching up to it.

But perhaps investors are already used to the new normal. The Bombay Stock Exchange’s benchmark Sensex index was actually up 0.25 per cent two hours after the 11am release of the data.

Related reading:
India raises rates after inflation rises, FT
India’s manufacturers feel inflationary pinch, FT
Inflationary pressures: Wide spreads in global price movements prove attractive, Special Reports