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India's economy suffers sharp slowdown

Latest update : 2009-02-27

Official data has revealed India's slowest economic growth in nearly six years. The 5.3 percent expansion in the three months to December is down from 8.9 percent a year earlier

AFP - India's economy grew at its slowest pace in nearly six years in the third quarter as the Asian giant started to feel the full brunt of the deepening global downturn, official data showed Friday.

The worse-than-expected 5.3 percent expansion in the three months to December, down from 8.9 percent a year earlier, spurred expectations the central bank will cut interest rate further to boost the flagging economy.

India's government has long said it needs double-digit growth if it is to drag hundreds of millions of its people out of grinding poverty.

The latest data provided grim reading for the Congress-led government, which must face general elections by May, and has been eager to spur the economy ahead of the polls.

"The massive slowdown in growth... has now dismissed speculation India is more resilient in this global turmoil because its economy is more domestically oriented, said Sherman Chan, an economist at Moody's

Growth in Asia's third-largest economy was sharply lower than the 7.6 percent expansion recorded in the second quarter and came in below analysts' forecasts of 6.1 percent.

Agricultural production, which accounts for nearly 20 percent of gross domestic product and provides a living for two-thirds of Indians, contracted by 2.2 percent compared with 6.9 percent growth in the year-ago period.

Manufacturing activity shrank by 0.2 percent, down from growth of 8.6 percent a year earlier amid flagging domestic and export demand.

Construction growth slowed to 6.7 percent, from 9.0 percent a year earlier.

The government has predicted the economy, which grew by nine percent last year, will expand 7.1 percent this financial year to March, but economists said the latest data meant that it would miss the target.

"It's not going to pan out, it's going to be more like 6.5 percent (growth)," said D.K. Joshi, principal economist at Crisil ratings agency.

Even before the latest data, economists were calling for more interest rate cuts by the central bank to stimulate the economy as the global financial crisis takes its toll on exports and other sectors.

With inflation at a 14-month low of 3.56 percent and expected to slip into negative territory by April or May, the bank has ample room to cut rates, economists said.

"This will put pressure on the central bank to be more aggressive in rate cuts -- they had talked about a downside risk to growth and now we have it," said Joshi.

Abheek Barua, chief economist at India's HDFC Bank, agreed.

"The figures definitely strengthen the case for a rate cut," he said.

The Reserve Bank of India has already reduced its leading lending rate to commercial banks -- the repurchase rate -- by 350 basis points to 5.50 percent since October to boost the economy.

The government has introduced three stimulus packages in three months to stimulate the economy.

Earlier this week, the government cut excise duties to eight percent from 10 percent and lowered the service tax to 10 percent from 12 percent. It also prolonged a cut in value-added tax announced last December.

"Extraordinary economic circumstances merit extraordinary measures," acting finance minister Pranab Mukherjee said Tuesday.

He warned that "the full impact of the recession in other parts of the world, especially Europe and Asia, is yet to unfold" and that the Indian economy "may feel a further impact in coming months".

The central bank has calculated the effect of the stimulus from higher government spending, tax cuts and interest rate reductions already amounts to around 80 billion dollars.

But with India's fiscal deficit ballooning, the government cannot introduce any "big bang" stimulus, economists say, and must rely heavily on interest rate cuts to jumpstart the economy.

Date created : 2009-02-27