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India\'s economic growth slumps to 5% in April-June quarter
Photo Credit: Reuters

India’s economy expanded at its weakest pace in more than six years in April-June, as consumer demand and private investment slowed at a time when global trade frictions have dampened business sentiment.

Asia’s third largest economy grew at a slower-than-expected 5.0% in the latest three-month period, compared with 5.8% in the previous quarter, government data showed on Friday.

For the same three months, China reported annual economic growth of 6.2%.

A Reuters poll of economists had forecast annual gross domestic product growth of 5.7% for the latest quarter. In the same period of 2018, India’s growth was 8%.

Analysts expect India’s economic slowdown could continue for the next two three years as the economy faces serious structural issues, hurting consumer demand and manufacturing.

“The government needs to address structural and cyclical issues to address the economic slowdown,” said Devindra Pant, chief economist of India Ratings, an arm of Fitch Ratings, citing a slowdown in the sales of autos and construction and a dip in consumer demand.

The growth numbers could prompt the Reserve Bank of India’s monetary policy committee to cut interest rates by at least 25 basis points in October. So far this year, it has cut the benchmark repo rate by 110 basis points.

The central bank has shown willingness to join hands with the government to try to revive consumer demand and investments because inflation remains below its 4% medium term target for a year.

In its annual report the RBI said on Thursday that reviving consumption demand and private investment - the highest priority - would need a big push for spending on infrastructure and adoption of structural reforms, including labour laws, taxation, and legal reforms, to ease the path for business in India.

"Modest stimulus" in pipeline

New Delhi is taking steps to try to revive growth, and recently got help from the central bank, in the form of a windfall dividend of nearly $21 billion. Finance ministry officials said this provided room for “modest stimulus” despite pressure to contain the fiscal deficit.

On Friday, the government announced a series of mergers involving ten state-owned banks in a bid to reform and strengthen the banking sector, which is struggling under a mountain of debt and to boost lending.

The government this week approved 100% foreign investment in coal mining and eased rules for sectors including contract manufacturing and single-brand retail.

Finance Minister Nirmala Sitharaman has said more measures to boost the economy will be announced in coming weeks.

Prime Minister Narendra Modi’s government has held several meetings with industry officials, seeking to stem the fall in auto sales, a slowdown in lending by non-bank finance companies, and revive consumer demand.

Policymakers are worried about a slowdown in consumer demand and private investments.

Many indicators – automobile sales, rail freight, petroleum product consumption, domestic air traffic and imports - signal drops in domestic consumption.

Auto sales in July tumbled 31% from a year earlier, the biggest decline in nearly two decades, resulting in the loss of hundreds of thousands of jobs.

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