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India’s waning consumption and a deteriorating global environment deepened a slowdown in Asia’s third-largest economy, nudging its government into action to supplement the central bank’s monetary stimulus.
Gross domestic product growth cooled for a fifth straight quarter to 5% in the three months ended June. That’s the slowest pace since March 2013 and well below the median estimate of 5.7% in a Bloomberg survey of economists.
The slowdown impelled the government to respond with a spate of announcements within the space of a week. It merged state-run banks to form stronger lenders and boost credit, eased foreign investment rules and gave concessions on vehicle purchases. It also secured more fiscal space to stimulate the economy with a windfall from the central bank in excess of $24 billion.
While the slowdown last quarter reflects, for the most part, a slump in investment before the election, high-frequency indicators since then suggest the economy’s lack of momentum has persisted.
Finance Minister Nirmala Sitharaman is still considering whether to use the windfall from the central bank to cut borrowings or boost spending. The other measures announced so far, like the easing of foreign investment rules, will also do little to boost consumer demand in the near term.
“There is an acute slowdown in manufacturing and agriculture on the back of a slowdown in aggregate demand,” said Rupa Rege Nitsure, group chief economist at L&T Financial Services in Mumbai. “The weight of structural factors has gone up in the slowdown and mere monetary stimulus may not work beyond a limit.”
Prime Minister Narendra Modi, who returned to power in May with a bigger margin than in 2014, is witnessing the worst slowdown so far under his watch. Unemployment is at a 45-year high, car sales have slumped the most in almost two decades in July and infrastructure output grew at the slowest pace in more than four years.
The government is retaining its target of achieving 7% GDP growth in the fiscal year ending March despite the latest numbers showing weakness, Krishnamurthy Subramanian, the finance minister’s chief economic adviser, said Friday.
“The government is very much alive to both what needs to be done in the short term as well as the structural reforms that are required in the medium to long run,” he said.
Shortly before the GDP data was released, Sitharaman announced creation of four new lenders by merging several state-run banks, a measure aimed at boosting credit growth.
“Banks with strong national presence and global reach is what we want,” Sitharaman said Friday. “Scaling up will only allow them to have lot more resources and therefore the lending cost can come down.”
The Reserve Bank of India has already cut interest rates by 110 basis points this year to the lowest in nine years to boost loans and revive investment, while signaling it’s ready to do more. It has been pumping in liquidity to tide over a cash crunch in the banking sector.
What Bloomberg’s Economists Say
“India’s slowdown is taking longer than anticipated to turn around, with the slump likely extending into the April-June quarter. The reasons -- a slow roll-out of a fiscal support package for farmers, and weak transmission of the Reserve Bank’s rate cuts.”
-- Abhishek Gupta, India economist
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The government added to that with a decision to immediately inject 700 billion rupees ($9.8 billion) to recapitalize state-run banks and encourage them to lend. Sitharaman Friday shared a breakdown of which lender could receive how much of that capital.
(Updates with government adviser’s comments in eighth paragraph)
--With assistance from Tomoko Sato and Adrian Leung.
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