The Indian economy grew by 7.7% in the 2Q11, which has been the slowest growth rate of the economy for the last 18 months. Many observers had expected lower economic growth in 2011 due to a considerable upward adjustment of the policy interest rate since last year. However, this rate of GDP growth is less than last year’s (8.8%) by more than 1 pp. The output breakdown of the latest GDP report shows that while services sector grew strongly (by 10%), the surge in services sector growth helped annual non-agricultural real GDP growth to accelerate to 8.4% in April-June, from an average of 7.9% in the six months to March 2011 (EIU, September 2011). Construction and manufacturing activities were less buoyant compared to the services sector.
Y-o-y growth rates of manufacturing and mining sectors have been reported at 2.3% and 2.8% respectively in July. Industrial output rose by 3.3% in July, down sharply from 8.8% in June. Although electricity output rose by 13.1%, there is no doubt that industrial activity has been slowing. The data from other economic indicators also suggests a downward trend in economic growth. In August, passenger-car sales fell by 10.1% on an annual basis. The HSBC Indian Manufacturing PMI fell for a fourth straight month in August, to 52.6 points, even below the 53.2 points of April 2009. However, according to the commerce ministry, merchandise exports continued to grow strongly in August, rising as far as 44.2% on an annual basis.
Merchandise imports also rose 41.8% in August to $38.4 bn. The net result was a deficit of $14 bn in the month. India is the largest importer of gold with 248.3 tonnes, and tops other major importers, even China with 166 tonnes. In India, gold is considered a store of value and with the inflation rate running high in recent years, demand for gold also has been on the rise significantly. Economists estimate that locking away money in gold costs the Indian economy up to 0.5 pp in real GDP growth annually.
On 16 September, the Reserve Bank of India (RBI, the central bank) raised interest rates by 25 basis points to 8.25% in a bid to curb inflation that has been accelerating in recent months. Wholesale inflation reached 9.8% y-o-y in August from 9.2% in July. The central bank noted that the global economic environment had worsened since its policy review in July referring to the global economic developments “a matter of serious concern”. Nevertheless, the RBI stated that its upward interest rate adjustment was necessary to contain inflationary expectations. On fiscal policy, expansion of government expenditure seems inevitable as the announcement of a National Manufacturing Policy, approved by the government is expected soon.
According to this plan, the share of the manufacturing sector in GDP is to rise from 15% to 25% by 2020. The government proposes to create several national manufacturing investment zones with world class infrastructure financed by the federal and states governments. The commerce minister has stated that the $90 billion Delhi-Mumbai Industrial Corridor would include seven investment regions across six states. Latest developments in the Indian economy have been the dramatic drop in the Indian Rupee’s exchange rate against the US dollar in September that followed the surprise government announcement of a higher-than expected bond issuance that has exceeded the expected amount by 0.6% of GDP. As a result, the yield on the benchmark 10-year government security rose 10 bp to 8.44 %. The government has stated that the fiscal deficit will be kept on track, but the composition of financing the budget deficit will change.