Indian growth at lowest level in two years

India’s economic growth slumped to a two-year low of 6.9 per cent in the second quarter [Reuters]

India’s economy grew at its weakest pace in more than two years in the quarter that ended in September, revealing the heavy toll that rising interest rates and the stumbling world economy are having on Asia’s third-biggest economy.

Economic growth slumped to 6.9 per cent in the second quarter, data showed on Wednesday, nearing the slump in the three months to June 2009 when the economy grew just six per cent.

The second-quarter growth was sharply below the the 7.7 per cent expansion logged from April to June, and 8.4 per cent growth posted a year ago.

Manufacturing output grew just 2.7 per cent year-on-year, down from 7.8 per cent a year earlier.

“There’s a clear slowdown,” Credit Agricole economist Dariusz Kowalczyk told the AFP news agency, warning of a potentially “quite significant” downturn longer-term due to lagged effects of 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 blistering nine per cent.

But some private economists said expansion could be as low as 6.5 per cent with the country shifting to a new, lower growth trajectory.

“We’re having multiple problems,” Mukherjee said, citing anaemic growth in Europe and the US that has slowed investment and export demand as well as “problems within the country”.

Political paralysis over contentious economic reforms has diminished investor confidence and the debt-laden government lacks the fiscal firepower to spur the economy.

Mukherjee has been steadily lowering his growth forecast since February as the economy has been hobbled by 13 interest rate hikes in under two years that have failed to tame inflation, still flaring near 10 per cent.

‘Tough times ahead’ 

“It’s been a while since we’ve seen an Indian growth number with a six at the start of it. The economy is slowing rapidly,” Glenn Levine, an economist at Moody’s Analytics, said. “It looks like tough times ahead.”

The growth downturn is an additional burden for the Congress party-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-fraud protests.

The sluggish growth means an end to India’s rate hiking cycle, said economists, who predicted the central bank may start cutting rates in the first six months of 2012 if inflation cools.

On Monday, the Organisation of Economic Co-operation and Development (OECD) warned the global slowdown would 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 last quarter from 9.5 per cent in the previous three months, its lowest in two years, hit by efforts to tame inflation and global economic headwinds.

Analysts said the slowing economy would pile more pressure on the rupee, trading at record lows against the dollar, as investors flee emerging markets for safer havens, rattled by the eurozone debt crisis.