Indian economy loses pace in Dec quarter, Ukraine clouds outlook

3 minute read

A man walks at the seafront as scattered clouds are seen over Mumbai's skyline, India, June 10, 2015. REUTERS/Danish Siddiqui

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  • Economy grows 5.4 y/y in Dec qtr vs 8.5% in Sept qtr
  • Manufacturing up 0.2% vs 5.6% in previous quarter
  • Economists fear Ukraine crisis threatens growth momentum

NEW DELHI, Feb 28 (Reuters) - India's economy lost momentum in the final quarter of 2021, with growth slowing from previous two quarters, data showed on Monday, as fears mount that soaring costs in the wake of Russia's invasion of Ukraine will further sap growth.

Gross domestic product rose 5.4% year-on-year in October-December, official data showed, less than 6% forecast by economists in a Reuters poll, and below upwardly revised 8.5% growth in July-September and 20.3% April-June expansion.

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"The growth number is really disappointing," said Sujan Hajra, chief economist at Mumbai-based Anand Rathi Securities, citing weakening rural consumer demand and investments.

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India, which covers nearly 80% of its oil needs through imports, possibly faces a widening trade deficit, a weaker rupee and higher inflation after crude prices spiked above $100 a barrel, with a hit to growth seen as the main concern.

"Given the geopolitical instability and crude oil prices, we think the fiscal and monetary policy accommodation will continue," Hajra said.

A 10% rise in oil prices could shave 0.2 percentage points off India's GDP growth while adding 0.3 to 0.4 percentage points to retail inflation, according to Nomura's estimates.

The Reserve Bank of India slashed its key repo rate by 115 basis points since March 2020 to soften the blow from the coronavirus pandemic and has kept rates low to support the economic recovery.

WEAKENING DEMAND

However, that recovery, already sputtering amid weak consumer demand and private investment, slowed further when the third wave of coronavirus infections hit Asia's third-largest economy last month.

Growth in consumer spending, its main driver, slowed to 7.0% from a year earlier in October-December quarter from revised 10.2% in previous quarter, Monday's data showed.

Manufacturing slowed to 0.2% growth from revised expansion 5.6% expansion in the previous quarter while the construction sector contracted 2.8% after 8.2% growth in the previous quarter.

The government also cut its growth estimate for the 2021/22 fiscal year ending on March 31 to 8.9% from 9.2% seen in January as COVID-19 related curbs weighed on activity early this year.

Investment growth slowed to just 2.0% on year compared with revised 14.6% increase in the previous quarter, with state spending slowing to 3.4% growth after a 9.3% rise in July-September.

Sakshi Gupta, senior economist at HDFC Bank, said India was likely to feel the ripple effects of widening sanctions against Russia.

"We see a downside risk of 20-30 basis points to our base forecasts," she said. For now HDFC sees the economy growing 8.2% in the next fiscal year.

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Aditional reporting by Anuron Kumar Mitra and Chandini Monnappa, Editing by Louise Heavens and Tomasz Janowski

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