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Recovery? Economy probably grew only 4.9% in Dec quarter

February 26, 2014 13:14 IST

Image: Labourers work at the construction site of a commercial complex in New Delhi.
Photographs: Anindito Mukherjee/Reuters Shaloo Shrivastava and Anu Bararia in Bengaluru

India's economic growth likely slowed to a near decade-low at the end of last year as high interest rates hit factory activity, according to economists polled by Reuters who don't expect a pickup in investment before May elections.

The poll of 36 economists, conducted between February 19 and 25, predicted Asia's third-largest economy grew 4.9 per cent over a year ago in the three months to December, similar to the 4.8 per cent rate in the previous quarter.

That is a shadow of the close-to-double-digit growth rates in recent years and is a signal of the problems gripping Indian factories, which are weighed down by both high interest rates and diminishing consumer demand.

Industrial output contracted in each of the last three months of 2013, led by steep falls in capital and consumer goods production.

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Recovery? Economy probably grew only 4.9% in Dec quarter

Image: A labourer carries watermelons at a market early morning in the old quarters of Delhi.
Photographs: Ahmad Masood/Reuters

"High borrowing costs necessitated by elevated inflation, coupled with subdued demand, have kept manufacturing and investment interest on the back foot," said Radhika Rao, economist at DBS.

A stalled investment cycle due to uncertainty over government policy has also pushed many infrastructure projects onto the back burner in recent years.

That situation is unlikely to improve soon and all 22 economists who answered an extra question said they didn't expect any substantial improvement in investment before general elections in May.

Elevated borrowing costs have added to manufacturers' woes after the Reserve Bank of India hiked interest rates three times between September and January to curb stubborn inflation which showed no signs of easing even as growth tumbled.

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Recovery? Economy probably grew only 4.9% in Dec quarter

Photographs: Reuters

While wholesale inflation did slow to an eight-month low in January, the fall was driven by softer food and vegetable prices which are considered volatile and could head higher again.

Still, economists have mostly predicted the Reserve Bank of India will pause its rate hike spree, especially after the central bank said it did not foresee further near-term tightening if consumer price inflation eased as projected.

India's retail inflation slowed to a two-year low of 8.79 per cent in January.

The poll also showed economists were split down the middle on whether Finance Minister P Chidambaram's estimate of containing the fiscal deficit at 4.6 per cent of gross domestic product was achievable.

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Recovery? Economy probably grew only 4.9% in Dec quarter

Photographs: Reuters

While 11 of 22 said Chidambaram's estimate is 'about right', an equal number said he was being optimistic.

The concern, though, is on the roll-over of subsidies.

"The deficit of 4.6 per cent will be achieved artificially through pushing the energy subsidy payments into the next fiscal year and through the one-time non-tax revenue from wireless spectrum sale and special dividends from state-owned corporations," said Hanna Luchnikava, economist at IHS Global Insight.

"Without these measures, the deficit is estimated to have reached around 5.2 per cent of gross domestic product."

Economists in the poll predicted the economy would grow 5.1 per cent in the first quarter of 2014.

(Polling by Sarmista Sen)

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