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Economy grows 7.7% in Q1, slowest in 6quarters

TNN | Aug 31, 2011, 04.20AM IST

NEW DELHI: The Indian economy expanded at its slowest pace in six quarters as theimpact of rising interest rates, high inflation and global uncertainty took its toll andeconomists said they expect further moderation in the quarters ahead as economicwoes continue in large areas of the developed economies.

But while growth has moderated, India is still one of the fastest growing economies inthe world. This is the second successive quarter when growth has slowed below the8% mark but still remains robust compared to other global economies.

Data released by the Central Statistics Office on Tuesday showed growth in the April-June quarter of the current financial year stood at 7.7% compared to 8.8% in the sameyear-ago period. In the January-March quarter, the economy expanded 7.8%.

Finance minister Pranab Mukherjee said the data was disappointing but called formore hard work for robust expansion. "There is no room for complacency. We shallhave to work hard, government, industry and I am confident that our workers andfarmers will contribute and ensure growth with inclusion, Mukherjee told reporters.

The manufacturing sector grew 7.2% in the April-June quarter below the 10.6%registered in the first quarter of 2010-11. The farm sector grew a robust 3.9% in theJune quarter, up from 2.4% in the same year-ago quarter. The services sector,which accounts for more than 52% of GDP, held its ground and grew10% in the June quarter. The construction sector was the laggard, growing 1.2%in the June quarter, down from 7.7% in the 2010-11 first quarter.

The statistics office also lowered the base for the year-ago quarter to 8.8% from thepreviously announced 9.3% and economists said this had helped project a healthiernumber. "Growth is poised to decelerate further due to the full impact of the ongoingmonetary tightening and the worsening global backdrop, said Rajeev Malik, senioreconomist at CLSA.

Investment and consumption have slowed as RBI raised interest rates 11 times in thepast 18 months to calm price pressures. But inflation still remains elevated at around9%. The RBI has said that after above-trend growth during 2010-11, growth isexpected to decelerate but remain close to the trend of about 8% in 2011-12. If globalfinancial problems amplify and slow down global growth markedly, it would impart adownward bias to the growth projection of around 8% indicated in the monetarypolicy.

It has said that growth prospects for the year 2011-12 seem to be relatively subduedcompared to the previous year. Global uncertainties, high global oil and commodityprices, persistent inflationary pressures, rising input costs, rise in cost of capital due to

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monetary tightening and slow project execution are some of the factors that areweighing on growth.

CLSA's Malik said the latest GDP details were supportive of another rate hike by theRBI on September 16 when it reviews monetary policy. He said the ongoing

moderation in growth suggests that the RBI would likely have to cut its GDP growthforecast of 8%, probably in its mid-year review towards end-October.

Industry groups also voiced concern over the moderation in growth. FICCI saidbusiness confidence was now at a two-year low. "If the current trends are anyindication, FICCI estimates that the GDP growth in the current fiscal may be in thelower band of 7.5%-8% with some significant downside risks, said Rajiv Kumar,Ficci secretary-general.