Indian economy under pressure as growth slips to 18-month low

India, one of the developing world's great economic motors, posted its weakest growth for six quarters yesterday. The GDP of Asia's third-largest economy (after China and Japan) expanded at an annualised rate of 7.7 per cent in the second three months of 2011. A year ago, the Indian economy was expanding at a rate of 8.8 per cent.

Finance Minister Pranab Mukherjee, said the figures were "not that much disappointing" given the weak recovery in the US and Europe. And they were indeed somewhat better than what analysts had expected. Ashutosh Datar, an economist at IIFL in Mumbai, said "the latest growth number reinforces the view that although growth is slowing down, it is not collapsing".

Yet the slowdown is set to continue since the Reserve Bank of India is expected to raise interest rates in September in order to curb rising prices. Inflation in India is 9.22 per cent, more than double the 4 to 4.5 per cent target of India's central bank.

The Reserve Bank of India has already raised policy rates 11 times since the beginning of 2010. Another interest rate hike is likely to further undermine domestic demand and stifle growth. Indian policymakers have already accepted that stable double-digit growth is unachievable.

The latest figures show that the Indian construction sector expanded at a rate of 1.2 per cent in the second quarter, down sharply from a 7.7 per cent increase a year earlier. Residential sales in Mumbai fell to a 30-year low in the quarter, according to data from Liases Foras Real Estate Rating and Research.

Manufacturing output increased by 7.2 per cent, down from 10.6 per cent growth in the same quarter last year. A survey by the Indian Chambers of Commerce this week saw business confidence at a two-year low due to fears about a possible return to global recession and pressures on domestic demand.

But, the latest figures also show that farm output rose by 3.9 per cent, up from 2.4 per cent in the second three months of 2011. There was also a slight increase in the growth rate of the transport and communications sector.

The export sector continues to thrive. Exports grew by 46 per cent between January and June.

Stock prices responded positively to yesterday's growth figures, with the Bombay Stock Exchange's benchmark Sensex index closing 1.6 per cent up.

The official forecast of the Reserve Bank of India is for total GDP growth of 8 per cent for 2011. But some independent analysts expect the figure to be closer to 7.5 per cent, which would undermine government's efforts to boost living conditions for India's 1.2 billion people (a fifth of whom are estimated to live on less than £1.25 a day).

Research that was published last year by Oxford Poverty and the Human Development Initiative found that eight of India's states accounted for more poor people than in the 26 poorest African countries combined.