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Yearender: India's economic growth dips in crosswind in 2011

12-15-2011 13:33 BJT

By Liu Yanan

MUMBAI, Dec. 15 (Xinhua) -- India's aspiration of economic growth acceleration in 2011 turned into deceleration in crosswind causing by both international market and domestic one.

The Indian central government's recent move to open up a domestic retail market to foreign investors also got suspended and led to the dysfunction of parliament.

Still, the United Progressive Alliance (UPA) led by Congress party sticks to the guns and keeps on track its efforts for mid- and long-term growth.

ECONOMIC GROWTH DIPS, INFLATION PERSISTS

India's economic growth in the first three quarters in 2011 extended its trend of slowdown since the first quarter of 2010.

The quarterly economic growth rates so far this year all fell below 8 percent in comparison of the government's original target of 8.75 percent to 9.25 percent for the current fiscal year ending on March 31, 2012.

The lower-than-expected 6.9 percent of GDP growth in the third quarter ended on Sept. 30, 2011 sent chills down the spines of researchers and governmental officials.

India's investment activities shrank 0.6 percent in the third quarter for the first time within two years and the manufacturing sector only registered 2.7 percent of growth from 7.2 percent in the previous quarter.

Industrial production in October decreased 5.1 percent, indicating the country's economy is slowing down sharply.

The mining sector fell into contraction of 1.8 percent in the third quarter due to continuous ban of mining in major producing states including Goa and Karnataka.

Soon after the release of the least GDP growth data, Indian Finance Minister Pranab Mukherjee trimmed his growth forecast for current fiscal year down to 7.3 percent compare with his forecast of around 9 percent in early 2011.

"If the growth in the third quarter falls short of 7 percent, there will be some concerns since the inflation is high," said Shubhada Rao, president and chief economist with India's YES Bank, shortly before the release of the growth data.

Meanwhile, Indian monthly inflation ranged from 9 percent to 10 percent in the first ten months of 2011, despite seven times of interest rate hikes so far this year.

Indian Central Bank, Reserve Bank of India (RBI), has articulated its strategy to bring down inflation by sacrificing some economic growth and domestic demand.

The recent record-making depreciation of Indian rupee against U. S. dollar also failed to transform lower international commodity prices into lower payment bills of import in rupee terms.

Global commodity prices are a significant risk factor for India 's domestic economic growth and inflation, the RBI said in its Monetary Policy Report in May.

The loose monetary policy in developed economies has kept international oil prices higher than the initial forecast of the Indian government.

EFFORTS MADE TO DRIVER ECONOMIC GROWTH

This year, the Indian central government has managed to kick off several key initiatives to attain 9 percent plus of economic growth in the medium and long term.

Among them are the plan in May to double export to 500 billion U.S. dollars within three years and the national manufacturing policy in October, which aims to lift the share of manufacturing in national GDP to 25 percent from 15 percent and create 100 million jobs.

Prime Minister Manmohan Singh said in August that in the 12th Five-Year Plan period (from April 2012 to March 2017), his government would give a renewed thrust to the second-generation reforms and forge a political consensus to this effect.

The rhetorical second-generation reform coincides with the 20th anniversary of India's market-oriented reform since 1991 but hasn' t drawn wide-range political consensus.

Shubhada Rao told Xinhua that the key drivers of India's economic growth include rural economy and governmental employment schemes, private consumption as well as export, which will face some headwind going forward.

"Now, governmental subsidy schemes in rural area are supporting, but governmental subsidy is not sustainable," she said.

India needs investment as a key driver of economic growth so as to develop infrastructure, which will create employment and opportunities supporting consumption in turn, according to Rao.

He said that the upturn of investment cycle will not crowd out consumption and India also needs policy reforms to sustain 8 percent to 9 percent growth.

The Indian central government, once bewildered by high-rank scandals and nationwide anti-corruption movement, announced to allow foreign investors to hold up to 51 percent shares in multi- brand retail business and 100 stakes in single brand shops in November.

Indian cabinet hoped this big-ticket move could improve efficiency of supply chain, tame inflation, better payment to farmers and create millions of jobs.

However, the ill-timed announcement has drawn the Indian government into a new gridlock with opposition and even its own allies and stalled the function of the parliament in its winter session.

MONETARY EASING EXPECTED

India's headline inflation will start to fall at the end of 2011 and will be around 7 percent by the end of March 2012, according to the RBI and top government officials.

The obvious fall of food inflation to 8 percent in the week ended on Nov. 19 indicated the softening of the inflation and provides some ground for monetary easing in the near term.

It's predicted that the RBI could clamp down cash reserve ratio (CRR) by 25 to 50 basis points as early as this week to ease liquidity constraints in the monetary system.

The RBI used to employ the adjustment of CRR as a precursor of interest rate actions and has kept CRR unchanged at 6 percent since May 2010.

Moreover, Shubhada Rao predicted that the RBI would start to cut interest rates in May or June of 2012, in line with the forecast of international research and investment body CLSA.

"The RBI should start cutting bank interest rates so that the cost of credit comes down," Secretary General of Indian major industrial organization Assocham D.S. Rawatat said at the end of November.

The economic slowdown in India has led to the downward adjustment of Indian banking industry from stable to negative by credit rating agency Moody's investors services in November.

Indian banking sector in 2012 will be stabilized and banks have adequate capital to absorb external impacts, said Ananda Bhoumik, senior director and country head of banks and financial institutions with Fitch Ratings India Private Limited.

Bhoumik said that Indian banks have bigger risks from concentrated loans for some sectors like airline and power industry, expecting likely aid from the Indian government.

The 13 hikes of interest rate by the RBI since March 2010 has caused the underperformance of consumer durable sector like automobile and housing.

"India's consumption story over the longer term is still quite intact. We believe that there will be some near-term headwinds because of the cyclical slowdown that we are heading into, and we are seeing some signs of slowdown in categories that require consumer financing," said Mahesh Nandurkar, executive director of the CLSA Asia-Pacific Markets.

Editor:Zhang Hao |Source: Xinhua

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