India’s economic growth slumped to a two-year-low of 6.9 per cent in the second-quarter, data showed yesterday, as it was hit by a string of rate hikes and a stumbling global economy.
The OECD has warned that the global slowdown was set to hit India
The expansion in July-September was the weakest since the three months to June 2009 when the economy grew just six per cent year-on-year, as western economies were emerging from the bruising global financial crisis.
“There’s a clear slowdown of economic activity,” Credit Agricole economist Dariusz Kowalczyk told AFP, warning of potentially a “quite significant” downturn longer-term due to aggressive rate hikes and a gloomy global outlook.
Finance Minister Pranab Mukherjee cut India’s growth forecast to 7.3 per cent for the fiscal year to March 2012 – from an original estimate of nine per cent – following the sluggish second-quarter figures.
“We’re having multiple problems,” Mukherjee said, citing anaemic growth in Europe and the United States.
“We shall have to try to face the situation and to see what best we can do.” He has been steadily lowering his growth forecast since February as the economy has slowed under the brunt of 13 interest rate hikes in 20 months that have failed to curb inflation which remains near 10 percent.
The slowing growth is an additional burden for the Congress-led government, which is facing strident opposition to its attempt to jump-start its stalled reform agenda by opening up India’s vast retail market to global competition.
Prime Minister Manmohan Singh’s popularity has already been sapped by surging food prices, which have hit India’s poor masses hardest, and a slew of corruption scandals that sparked huge anti-graft protests.
“The pressure of higher rates, coupled with the deteriorating external situation, tighter credit conditions, and a fall in confidence, have all served to undermine growth,” said Glenn Levine, economist at Moody’s Analytics.
The weakening economy means India’s rate hiking cycle now is over, said economists, who predicted the central bank may start cutting rates by mid-2012 if inflation cools.
The growth data for the three months to September was sharply below the 7.7 per cent expansion logged from April to June, and the 8.4 per cent growth posted a year ago.
The slowdown was widespread with India’s manufacturing output growing by just 2.7 per cent year-on-year, down from 7.2 per cent in the first quarter of the year and mining output shrinking.
A combination of high inflation and higher interest rates “is bearing down on consumption,” said Robert Prior-Wandesforde, head of Asian Economics at Credit Suisse.
On Monday, the Organisation of Economic Cooperation and Development warned the global slowdown was set to hit emerging giants India and China, but could also bring a respite from inflation.
China’s growth eased to 9.1 per cent in the past quarter from 9.5 per cent in the previous three months – its lowest in two years, hit by efforts to tame inflation and the global economic turbulence.
The Indian government – hamstrung by debt – lacks the fiscal firepower to stimulate the economy, making it less able to weather another global downturn after the financial crisis of 2008-09.