India’s Economy May Expand at Weakest Pace Since 2003

By Cherian Thomas

Feb. 9 (Bloomberg) -- India’s economy may grow at the slowest pace since 2003 this year, undermining Prime Minister Manmohan Singh’s re-election bid in two months.

Asia’s third-largest economy will probably expand 7.1 percent in the year ending March 31, the statistics office said in a statement in New Delhi today. The median forecast of 24 economists in a Bloomberg News survey was for a 6.8 percent gain.

India and China, the world’s fastest-growing major economies since 2004, are succumbing to the worst global financial crisis since the Great Depression, rendering millions of people jobless. While that may create social unrest in China, Singh faces the risk of being voted out in general elections, said Duncan Campbell, director of the International Labor Office’s economic analysis department.

“Around 7 percent growth isn’t good enough for India,” said Geneva-based Campbell. “India needs 10 percent growth each year for a one percent increase in employment.”

That may be a hard task to achieve in the immediate future as foreign investors, stung by the global recession, shy away from emerging markets including India, says Morgan Stanley economist Chetan Ahya.

Ahya said overseas investors were instrumental in the Indian economy’s record 9.3 percent average expansion in the three years to March 2008. Last year they pulled out $13.1 billion from Indian stocks after buying $17.2 billion of equities in 2007.

More Vulnerable

The Bombay Stock Exchange’s Sensitive Index rose 1 percent to 9,394.90 as of 11:08 a.m. local time, the highest since Jan. 30. The yield on the benchmark 9-year bond gained 1 basis point to 6.20 percent in Mumbai from 6.19 percent before the report, while the rupee was little changed at 48.58 per dollar.

India has become vulnerable to slowdowns and financial crises in other countries since 1991, when Singh as the finance minister started to open the economy to foreign investors. Trade represented 35 percent of gross domestic product for the year ended March 31, up from 21 percent in 1997-98, the year of the Asian financial crisis, according to the central bank.

India’s exports declined for a third straight month in December as the global recession reduced overseas orders. Exporters may shed 10 million jobs by next month, estimates the Federation of Indian Export Organisations, a trade group.

Global Recession

China’s economy grew 9 percent for all of 2008 after a 13 percent expansion in 2007 as the global recession pummeled exports. The exporting collapse and the economic slowdown have cost the jobs of 20 million migrant workers, raising the risk of social unrest in the country, analysts say.

“Globalization spreads both prosperity and distress,” said Chakravarthy Rangarajan, who served as India’s central bank governor between 1992 and 1997 and is now a lawmaker. “Prospects for the next financial year do not look brighter in India.”

India’s domestic demand has been weakened by efforts to control inflation by the central bank, which raised interest rates in July to a seven-year high. Industrial production grew 3.9 percent in the eight months to November, less than half the pace in the same period last year.

Though inflation has cooled after peaking at a 16-year high of 12.91 percent in August, which allowed the central bank to ease monetary policy since October, commercial lenders have been slow to follow the lead in cutting rates because they are still paying high interest on deposits.

‘Considerable Room’

Governor Duvvuri Subbarao has cut the Reserve Bank of India’s key repurchase rate to a record 5.5 percent from 9 percent in October. Wholesale prices for the week ended Jan. 24 advanced 5.07 percent, the least in about a year. The central bank last month forecast inflation will slow to below 3 percent by March 31.

Even though Subbarao refrained from lowering rates in the last monetary policy announcement on Jan. 27, saying commercial banks have “considerable room” to cut their lending rates, he said yesterday that the central bank has room to adjust rates further to spur the economy as inflation eases.

That’s because budget constraints are forcing India to rely more on interest-rate cuts to buoy the economy.

India’s budget deficit reached 164 percent of the year’s target in the nine months ended Dec. 31, the government’s auditor said last month, as the government wrote off 717 billion rupees ($14.7 billion) of farm loans, cut taxes and announced an extra 200 billion rupees of spending to protect the economy from the global recession.

Policy Options

“With the constraints on fiscal policy and the risks firmly tilted toward lower growth and lower inflation, we think monetary policy needs to be aggressive,” said Tushar Poddar, a Mumbai-based economist at Goldman Sachs Group Inc.

Still, Foreign Minister Pranab Mukherjee, who has been given charge of the finance ministry as Singh is recuperating from cardiac surgery, may unveil Feb. 16 more spending plans to support the economy in an interim budget for the first four months of the next fiscal year that starts April 1.

The government may dissolve parliament when its session ends on Feb. 26. A full budget for the next fiscal year will be unveiled after the new government assumes office in May.

To contact the reporter on this story: Cherian Thomas in New Delhi at Cthomas1@bloomberg.net.