India GDP growth slows to 7.1% in April-June
Reuters | Photo Credit: Reuters

India’s gross domestic product expanded 7.1% in the April-June period, slowing from the 7.9% pace in the previous quarter, underscoring the challenges the government faces in meeting its growth targets.

The manufacturing sector grew 9.1%, farm output rose 1.8% and production of electricity and other utilities expanded 9.4% in April-June this year, the Central Statistics Office said in a statement. But the mining sector contracted 0.4% and growth in the construction sector slumped to 1.5% from 5.6% a year earlier.

Growth in gross value added—an input of GDP that the central bank monitors—slowed to 7.3% in the first quarter from 7.4% in the previous three months.

Although growth has slowed, India remains the world’s fastest-expanding major economy. China, the world’s second-largest economy and for long the fastest-growing, said last month its GDP grew 6.7% in April-June. This was the same as the previous quarter and the slowest pace in seven years.

The data also shows India remains a bright spot in the world where several other major economies including Russia, Brazil, Japan and those in Europe are either contracting or growing in low single digits.

Still, the data highlights the difficult path ahead for Prime Minister Narendra Modi’s government to exceed last financial year’s pace. India’s economy grew 7.6% in 2015-16, helped by rapid expansion in the January-March quarter, and the government said in February it expected growth for 2016-17 to be between 7% and 7.75%.

The Modi government has been striving to boost growth, attract foreign investment and make it easier to do business in India. The government has also passed a landmark tax reform bill that will simplify the myriad structure of indirect taxes and make India a common market for goods and services.

But hurdles remain. While monsoon rainfall—critical for the farm economy—is likely to be normal this year, state-run banks are bleeding due to rising bad loans.

Inflation has also been accelerating over the past few months and industrial output is struggling to grow at a sustained pace. Retail inflation jumped to a 22-month high in June, and the government said on Wednesday that growth in eight core infrastructure industries—which make up 38% of industrial output—slowed to 3.2% in July from 5.2% in June as steel and crude oil production fell.

An uptick in inflation has also prompted the Reserve Bank of India (RBI) to stand pat on interest rates in the past two policy reviews in June and August. The RBI last cut interest rates, by 25 basis points, at its April monetary policy review. It has lowered interest rates by 150 basis points overall since January 2015, but banks have been slow to pass on the benefit to consumers and companies due partly to high bad loans.

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