New Delhi (Reuters) – India’s annual economic growth slowed to 4.5% in the July-September quarter, its weakest pace since 2013, putting pressure on Prime Minister Narendra Modi to speed up reforms as five rate cuts by the central bank have failed to boost investments.
Economists said the drop in growth could prompt the Reserve Bank of India to cut its repo rate INREPO=ECI by 25 basis points to 4.90% at its meeting next week, although investors are skeptical about how effective monetary policy can be in boosting growth in the current scenario.
The gross domestic product data INGDPQ=ECI released on Friday showed consumer demand, private investment and exports all struggling.
The year-on-year growth figure was below the 4.7% forecast in a Reuters poll of economists and compared with 7% growth in the same quarter of 2018, and 5% in the previous quarter.
Modi’s government, given a second term by voters in May, has taken several steps including cutting corporate tax in September and speeding up privatization of state-run firms to boost investments and bolster growth.
India needs to grow at around 8% a year to create enough jobs for the millions of young people joining the labor force each year, yet many economists see the current slowdown continuing for another year or two, underlining the case for urgent reforms.
“At this point in time, direct fiscal intervention and/or cut in personal income tax rates to put in more money in the hand of consumers appears to be the only short-term solution,” said Kunal Kundu, India economist, Societe Generale, Bangalore.
However he said the government had limited room to maneuver as the fiscal deficit crossed the full-year target in the seven months to October.
If the RBI does cut rates, it would the sixth consecutive policy meeting that it has done so. The repo rate has fallen 135 basis points so far this year but banks, saddled with about $140 billion in stressed assets, have not cut their lending rates much.
The government is nudging the central bank to set up a fund to buy out stressed assets of the country’s top 25 shadow lenders and revive the financial sector, a government source told reporters on Thursday.
Modi is pushing in parliament for labor reforms as well as measures to offer more incentives to attract foreign investors to set up factories in India.
Firms show little appetite to invest due to sluggish domestic and global demand.
Featured Image courtesy: Financial Express.