India Growth Seen Stuck Below 5% for Longest Stretch Since 2005

India Growth Seen Stuck Below 5% for Longest Stretch Since 2005

India’s economic growth probably held below 5 percent for a fourth straight quarter, the longest stretch in data going back to 2005, as Prime Minister Manmohan Singh struggles to boost investment and tame elevated inflation. Gross domestic product rose 4.6 percent in July through September from a year earlier, compared with 4.4 percent in the prior quarter, according to the median of 25 estimates in a Bloomberg News survey ahead of a report due on Nov. 29.Expansion may continue to struggle with Goldman Sachs Group Inc. predicting last week that the central bank would further raise interest rates while the government faces pressure to curb spending and shrink the budget deficit. Exports have provided a bright spot following a drop in the rupee, cushioning factory output from moderating demand among India’s 1.2 billion people.

“Growth will remain in a low gear,” said Radhika Rao, an economist at DBS Bank Ltd. in Singapore, referring to the second half of the fiscal year ending in March. “The odds of expenditure restraint are high as India has to prevent a credit-rating downgrade that would disrupt foreign investment.”

A reform-minded administration must emerge from general elections due by May for expansion to exceed 5 percent in the year ending March 2015, Rao said.

The rupee, down about 12 percent in the past year, strengthened 0.6 percent to 62.495 per dollar at the close in Mumbai yesterday. The S&P BSE Sensex share index rose 1.9 percent. The yield on the government bond maturing in November 2023 fell to 8.75 percent from 8.78 percent on Nov. 22.

Rajan’s Increases

Goldman Sachs expects Raghuram Rajan to raise the policy interest rate to 8.5 percent next year from 7.75 percent, adding to two increases of a combined 50 basis points since he became governor of the Reserve Bank of India in September.

Finance Minister Palaniappan Chidambaram, who has repeatedly said he’ll stick to deficit targets, will reduce planned outlays on items such as roads, ports and welfare programs by about 700 billion rupees ($11 billion) this fiscal year, according to Yes Bank Ltd.

Chidambaram has pledged to narrow the deficit to a six-year low of 4.8 percent of GDP in the 12 months that began April 1.

India’s credit rating may be cut to junk next year unless the general election leads to a government capable of reviving economic expansion, Standard & Poor’s said earlier this month.

Singh’s coalition, beset by graft scandals, has struggled to spur investment and ease supply bottlenecks that contribute to consumer-price inflation of 10 percent, the fastest in Asia.

Rupee Steps

Economic expansion is running at almost half the average annual pace of about 8 percent in the past decade. Some 825 million Indians live on under $2 per day, World Bank data show.

Rajan, a former International Monetary Fund chief economist, has offered concessional dollar swaps to banks to spur inflows of the U.S. currency and bolster the rupee, whose weakness makes imports costlier. The rupee has appreciated about 10 percent since slumping to a record low in August.

Rajan said last month that he expects an improvement in India’s economic performance, partly on exports (INMTEXUY) and a revival in major investment projects. Overseas sales rose in the four months through October, snapping declines, while factory output has increased for three straight months.

Farm and industrial production will help the growth recovery in the second half of the fiscal year, said Shubhada Rao, chief economist at Yes Bank Ltd. in Mumbai.

For now, India’s expansion lags behind regional rivals from China to Indonesia, and the South Asian nation’s companies are grappling with conditions akin to stagflation.

China grew 7.8 percent last quarter and Indonesia 5.6 percent. Vehicle sales at India’s Tata Motors slid 28.1 percent in October from a year earlier.

Singh has eased curbs on foreign investment to try and bolster growth before next year’s election.

Opinion polls signal neither his Congress Party nor the main opposition Bharatiya Janata Party, whose campaign is led by Gujarat chief minister Narendra Modi, will get a majority.

“An investment cycle requires certainty and I see that happening only after the elections,” said Dharmakirti Joshi, chief economist in Mumbai at Crisil Ltd., the Indian unit of S&P.

To contact the reporter on this story: Unni Krishnan in New Delhi at ukrishnan2@bloomberg.net