India forecast on Tuesday economic growth would fall below seven percent for the first time in three years, hit by an aggressive string of interest rate hikes and economic reform paralysis. Asia's third-largest economy will probably grow by 6.9 percent in the year to March - far below a budget projection of nine percent - and down from last year's 8.4 percent expansion, the government's central statistics office said.
"The slowdown story is clearly evident," said Indranil Pan, chief economist at India's Kotak Mahindra Bank. "Mining and manufacturing growth has slipped sharply." The 6.9 percent growth would be the slowest since 2008-2009 when India was reeling from the global financial crisis and the second weakest in nine years. Economists expect growth to be even lower the following year at around 6.3 percent - more than three percentage points below the peak of 9.6 percent hit in 2006-2007 during India's last economic boom.
The central bank has raised interest rates 13 times since March 2010 to curb stubborn inflation, which at 7.47 percent is still the highest among the BRIC grouping of Brazil, Russia, India and China.
Manufacturing was expected to grow by just 3.9 percent in this fiscal year, slightly over half last year's level of 7.6 percent. The weaker growth outlook may prompt the central bank to start reducing interest rates sooner and more aggressively than anticipated, Credit Suisse economist Robert Prior-Wandesforde. On top of slower growth, analysts expect the government to overshoot its deficit target of 4.6 percent for the current year by at least a percentage point due to ballooning public subsidies to support India's poor. Unlike during the last global financial crisis, "the fiscal space also does not afford a chance (for India) to pump-prime the economy," said Kotak Mahindra's Pan.
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