beyondbrics

No surprise, but yet another blow to round out an awful year: India’s economy will grow at its slowest pace in three years in the fiscal year ending in March, according to an outlook released on Tuesday by the government’s central statistics office.

The office revised its estimate for GDP growth for the year to 6.9 per cent – much less than the 9 per cent expected last April and a blow to the rising army of new consumers among the country’s 1.2bn people.

Indians got used to growth of 8 per cent or 9 per cent in the years prior to the 2008 financial crisis. Anything less counts as a big disappointment to the millions who have joined the real economy only to find opportunities for employment slipping away.

This year’s growth, if confirmed, will mark a sharp decline from last year’s 8.4 per cent. That will be no great surprise, given how terrible a year 2011 was for India. Inflation hovered near double digits, foreign inflows dried up, the rupee was Asia’s worst-performing currency, and the country’s current account and fiscal deficits swelled. Most importantly, industrial production contracted, driving down GDP growth.

“What’s driving the number down has been extremely clear for quite some time… [in] the manufacturing segment we were looking at a much lower level because the industrial segment has come down and mining is also on a negative trajectory,” Indranil Pan, chief economist at Kotak Mahindra bank, told beyondbrics.

Manufacturing is expected to grow by just 3.9 per cent in the year to March compared with 7.6 per cent in the previous year. Agriculture is set to grow by 2.5 per cent, compared to 7 per cent in the previous year. Mining is set to contract by 2.2 per cent, compared to 5 per cent growth a year earlier.

Economists were shocked in December when industrial production figures for October showed a 5.1 per cent contraction (later revised up to -4.7 per cent). Those figures bounced back for November, to 5.9 per cent growth, but the continual bad news throughout the year laid the ground for lowered growth estimates.

“This pattern has been filtering steadily throughout the year so it doesn’t really shock people,” said one Mumbai-based economist who did not wish to be named. “It’s been internalised that growth is slowing down, so close to 7 per cent or even sub-7 per cent is not unexpected.”

The Reserve Bank of India, which has raised rates 13 times since March 2010 to fight sticky inflation – thereby hampering growth – has also internalised the slowdown. The bank revised down its growth estimate to 7 per cent recently, which means Tuesday’s news is unlikely to provoke a rate cut any sooner than April, as previously expected.

Next year, Pan said, growth is expected to remain in line with this year, or marginally to improve.

“We are not really looking at significant upside to growth simply because [in] the core trends that are needed for growth, say, in consumption or investment demand, we are not expecting significant upside there,” said Pan.

Related reading:
Indian GDP growth drops below 7%, FT
[Video] India’s 7% growth ‘not good news’, FT
India’s GDP: the new normal is here, beyondbrics
Indian rupee hits record low against dollar, FT