MUMBAI • India’s economy grew at a much slower pace than economists expected last quarter, giving the central bank more reason to keep interest rates unchanged this week.
After breaking through the 8% mark in the quarter through June, growth eased to 7.1% in the three months through September — lower than almost all the estimates in a Bloomberg survey — as back-to-back rate hikes in June and August, a funding squeeze and subdued growth in farming put a brake on the world’s fastest-expanding economy.
With inflation already at a 13-month low and oil prices sliding, calls for the Reserve Bank of India (RBI) to stay on hold tomorrow — as most economists expect — are getting stronger. The RBI kept its benchmark rate unchanged at 6.5% in October, lowering its growth forecast for the first quarter of the 2020 fiscal year to 7.4%.
“We continue to forecast that India’s growth will slow down in 2019,” said Priyanka Kishore, an economist at Oxford Economics in Singapore. “And with cost pressures easing, we now expect the RBI to pause policy for an extended period.”
GDP gained 7.1% in the July-September quarter from a year ago, compared to a median estimate of 7.5% in a Bloomberg survey of economists. Gross value added — a key input of GDP that strips out taxes — rose 6.9% in the July-September quarter from a year ago, compared to the median estimate of 7.3%. Agriculture growth eased to 3.8% in the quarter; manufacturing slowed to 7.4%. Private consumption growth weakened to 7%, while government spending gained 12.7%.
Like elsewhere in Asia, growth in India is coming off the boil amid waning global demand wanes and trade tensions. While the 7%-plus expansion still makes India a growth star, the more subdued outlook brings uncertainty to fiscal and monetary policy.
Budget goals may come under pressure if slower growth prompts Prime Minister Narendra Modi’s administration to boost spending before elections next year. It may also increase tension between the RBI and the government, which is trying to get governor Urjit Patel and his team to do more to ease the credit crunch.
“Based on the September quarter, GDP growth and likelihood of lower growth in the second half of the year, chances of fiscal slippage are very high,” said Devendra Kumar Pant, chief economist with India Ratings & Research, the local unit of Fitch Ratings.
“The central bank is expected to stay on hold,” he said.
“Inflation has already slowed sharply and the recent tumble in oil prices points to a further downtrend. The added disinflationary force from a widening output gap is likely to act as the final straw for a change in RBI’s policy stance.
“We expect the central bank to hold rates at its Dec 5 review and revert back to neutral from its stance of calibrated tightening,” said Abhishek Gupta of Bloomberg Economics.