India's economy extends slump

India's economy extended its long slump in the last quarter, with lower-that-expected growth keeping it on track for its worst year in a decade and underscoring the urgency of politically difficult reforms to spur a revival.

Gross domestic product (GDP) grew 5.3 per cent from a year earlier in the July-September period, provisional government data showed today, below the 5.5 per cent posted for the three months ending in June.

Reacting to the number, prime minister Manmohan Singh's chief economic advisor forecast full year growth of between 5.5 and 6 per cent, which would be the slowest since 2002/3.

"It will be between the two, because in order to get 6 per cent we really need very strong growth in the second half," an advisor told TV network CNBC.

The number was lower than a poll had forecast and matched the January-March quarter, which was the weakest growth rate in three years.

However, economists say ongoing inflation worries mean the Reserve Bank of India (RBI) is not likely to cut interest rates at its next policy meeting on December 18th.

Facing the prospect of the downturn stretching into a general election due in 2014, Mr Singh launched some of the most daring initiatives of his tenure in September, including raising subsidised diesel prices and opening sectors like supermarkets to foreign players, triggering a market rally.

But the government and economists warn more needs to be done to attract capital investment and kickstart plans to modernize India's decrepit infrastructure. Opposition parties say the reforms hurt the common man and weaken regional governments.

"Even with the uptick in business sentiment over the restarted reform initiative, the real economy will take some time to improve. Investment will continue to lag," said Jyoti Narasimhan, senior principal economist, at IHS Global Insight.

India is battling weak consumer demand in overseas and domestic markets. The rupee currency remains weak and the trade deficit the widest ever after merchandise exports, which make up about 10 per cent of GDP, fell for six straight months. Industrial output has contracted in four out of last six months.

Market reaction to the data was muted, partly because of sustained positive sentiment after parliament broke a deadlock yesterday that had held up debate on reforms to attract foreign investment in the insurance and pension industries. Mumbai's main stock index hit a 19-month high.

"Domestic markets held on to gains as the Q3 GDP was along expectations," said Radhika Rao, an economist with Forecast in Singapore.

"Progress on reforms and proper functioning of the parliament will be important in shaping sentiments further out."

Markets were also buoyed by a mildly upbeat view from Goldman Sachs yesterday, with a report forecasting India's economic growth was likely to accelerate to 6.5 per cent in 2013.

Reuters