Growth Slumps For BRICS Powerhouse Economy

Once seen as a powerhouse of the emerging nations, India’s economy continues to struggle.

Figures reveal that its economy grew by 5% in the last financial year – a sharp drop from the 6.2% recorded for 2011/12 and a steep fall from the 9.3% seen in the year before that.

Now credit ratings agency Standard and Poor’s is warning that there is a good chance that India will lose its respected sovereign grade rating and be replaced by a junk status.

Such a move would steeply increase the country’s borrowing costs, while India’s credit rating is already the lowest of the other BRICS countries – Brazil, Russia, China and South Africa.

The 5% record for economic output is the lowest figure for growth seen in a decade and is viewed as a major set-back for the corruption and scandal hit government which is facing a general election next year.

Inflation hits a low

In addition, India’s businesses have low confidence and there has been a slump in investment, couple that with increasing inflation and weak export demand and the future is not looking rosy for the country.

Indeed, the Organisation for Economic Cooperation and Development (OECD) has announced its growth projection for India this year is being readjusted from 5.9% to 5.3%.

The economic figures do not read well with India’s manufacturing sector, seen as a vital tool in creating much-needed jobs, seeing its output increase by 2.6% but mine production fell by 3.1%.

One bright spot in the figures is news that the services sector of banks, real estate and insurance rose by 9.1%.

However, the country’s rate of wholesale inflation, the most widely used measure, was running at 4.89% which is a 41-month low.

The country’s consumer price index tells a different story which shows that inflation, led by big food and beverage price increases, is now at 9.39%.

Weak momentum

The inflation figures are leading the government to put pressure on the country’s central bank to ease borrowing costs after aggressive rate increases in 2010 and 2011 were brought in to tackle double-digit inflation increases.

Analysts say that despite the Indian government talking up the country’s economy there is a need for further structural reform and efforts to boost demand.

Siddhartha Sanyal, an economist with Barclays Capital, said: “The recovery is subdued and growth momentum remains weak.”

Shubhada Rao, an economist at Yes Bank, added: “The government has to do more to turn around investment sentiment.”

After a series of pro-market reforms in late 2012, the government appears to have run out of ideas, which means that hopes for a recovery will be delayed or muted at best.

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