Asia’s third-largest economy expanded 6.1 percent in the three months to Dec. 31 from a year earlier after a 7.6 percent gain in the previous quarter, according to the median forecast of 21 economists in a Bloomberg News survey. The statistics agency’s numbers are due today at 11 a.m. in New Delhi.
Policy makers across Asia are slashing interest rates and spending more as the worst financial crisis since World War II hits the region’s overseas sales and saps consumer demand. Reserve Bank of India Governor Duvvuri Subbarao, who has reduced the central bank’s key policy rates to a record low since October, says there’s “certainly room” for further cuts.
“India’s growth momentum is easing and policy makers must act to support the economy,” said Sherman Chan, a Sydney-based economist at Moody’s Economy.com. “The central bank needs to ensure ample liquidity and low interest rates.”
The Reserve Bank of India has responded to the deepening global slump by reducing its repurchase rate by 3.5 percentage points to 5.5 percent and the reverse repurchase rate to 4 percent from 6 percent. It also cut the cash reserve ratio, or the proportion of deposit lenders must set aside as cash, to 5 percent from 9 percent.
Fiscal Stimulus
To provide fiscal support to the economy, Prime Minister Manmohan Singh’s government has cut taxes and increased spending on roads, ports and other infrastructure. Acting Finance Minister Pranab Mukherjee this week slashed excise duty across the board to 8 percent from 10 percent and the service tax to 10 percent from 12 percent, besides extending a 4 percentage point cut in the central value-added tax announced in December beyond March 31.
The combined stimulus from interest-rate cuts, increased government outlays and lower taxes totals almost $80 billion, or 7 percent of India’s gross domestic product, according to the central bank.
Still, the fiscal spending is straining the budget deficit, which the finance ministry forecasts will widen to 6 percent of GDP in the year ending March 31 from a target of 2.5 percent.
The government expects borrowings next year to increase to a record 3.62 trillion rupees ($72 billion). Indian government debt accounts for 80 percent of the nation’s GDP.
The yield on benchmark government bonds due in 2018 has gained 131 basis points to 6.55 percent this year as additional debt sales sapped demand for the securities.
Credit Rating
Standard & Poor’s said Feb. 24 that the nation’s credit rating will be cut to junk as government debt is reaching a level that’s “not sustainable.” S&P reduced India’s rating outlook to negative from stable.
Mukherjee said the rating company’s move was “not unexpected,” adding that the global downturn “requires extraordinary steps from the government.”
The government, whose five-year term comes to an end in May, wants to prop up growth and reduce unemployment as it prepares to face general elections. Already, companies have cut about half a million jobs in the three months ended December, according to the labor ministry.
Apollo Tyres Ltd., the Indian tire maker partly owned by Michelin & Cie, said this month it plans to cut its workforce by 15 percent, or 1,500 employees. A survey of 50 textile companies by the Apparel Export Promotion Council of India released this month found they slashed 14 percent of their workers in November.
Slowing Growth
The government expects economic growth to slow to 7.1 percent in the year to March 31, the weakest since 2003. Even though that pace makes India the second-fastest after China among the world’s largest economies, it’s not enough to generate jobs in a country where the number of people looking for employment increases by more than 10 million each year.
Growth of 7 percent “ain’t good enough,” said Duncan Campbell, director of the International Labour Organization’s economic analysis department. Campbell forecasts India needs at least 10 percent growth a year for a one percent increase in employment.
Still, “India has such a strong democratic system that there may not be a threat of social upheaval like in China,” said Campbell. “There’s an election coming up, and the people can express their disapproval by tossing out the government.”
India’s GDP Forecasts
GDP YoY%
Company Oct-Dec
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Median 6.1%
Average 6.0%
High 6.9%
Low 5.2%
Number of Estimates 21
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Action Economics 6.5%
Anand Rathi Securities 5.7%
Axis Bank Ltd. 5.4%
CARE Ratings 6.3%
CRISIL Ltd. 6.0%
DBS Group 6.2%
Dun & Bradstreet Info. 6.1%
HSBC Singapore 6.6%
ICICI Bank 6.0%
ICICI Securities 6.9%
IDBI Gilts Ltd. 5.7%
Inst. of Economic Growth 6.8%
JPMorgan Chase Bank 5.7%
Kotak Mahindra Bank 6.2%
Kotak Securities Ltd. 5.7%
Macquarie Capital Securities 5.5%
Moody’s Economy.com Inc. 6.1%
Nomura International (HK) 6.2%
Reuters IFR 5.2%
Standard Chartered Bank 5.3%
UBS 6.5%
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