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Indian economy staring at slowest pace of growth in over two years

The Indian economy is slowing but the extent of the slowdown will be known when the government comes out with the second quarter gross domestic product (GDP) data on Wednesday.

According to consensus estimates, India's GDP is seen rising at the slowest pace in the last nine quarters. GDP is the value of all finished goods and a service produced in a country and indicates the economic health of a nation.

The GDP data is seen rising 6.9 per cent in the second quarter ending September 2011 as per median estimate of economists polled by NDTV Profit. That would be lower than the economic expansion in the first quarter of this year, which stood at 7.7 per cent. The range of expectations from economists indicates a growth between 6 and 7.5 per cent but the consensus is on lower growth in Q2.

That means more troubles for the government which is still battling near double digit inflation. The slowdown is also a manifestation of the repeated rate hikes - 13 over the past 18 months effected by the Reserve Bank. While these rate hikes have failed to bring down inflation, they have adversely affected the investment cycle.

Analysts expect gross fixed capital formation, a key measure of capital development, to slow significantly from the 7.9 per cent in the first quarter. Private consumption is also expected to slow from 6.7 per cent in the first quarter. Economists point to costlier credit and stalling markets abroad behind this.

A slowdown in industrial growth, which is slated to slip to near 4 per cent levels, is the main reason behind the slowdown in overall economic growth.

The Index of Industrial Production (IIP) grew at its slowest pace in two years in September. The services sector, which grew at 10 per cent in the last quarter, may slip to around 9 per cent. Farm sector growth is expected between 2.5-3 per cent.

While a slowdown looks inevitable, the way forward is still not clear. "The RBI needs to think of rate cuts. Most people expect it in February-March but I would say even as early as December it should be considered. But they may not be that bold," Surjit Bhalla, managing director of Oxus Research and Investments said.

Others emphasised that tackling high inflation should be a focus. "Before we worry about a rate cut, we need to worry about inflation. High inflation is eating into consumption and now with the rupee depreciating, inflation will pick up once again," Sajid Chenoy, India Economist at JP Morgan said.

For the government, the choices are difficult. Markets are already at two year lows, mainly because foreign investors seem to have lost confidence in the India growth story.

"If this GDP serves as a wakeup call to the extent that we have to take urgent policy decisions across the fiscal and monetary spectrum I will be very happy," KR Bharat, MD, Advent Advisory Services Pvt Ltd said.