India’s GDP growth fell to just 6.9% in the second quarter (July – September) of the current financial year 2011-12 due to high inflation, high interest rate and global economic slowdown. This was the slowest GDP growth in last nine quarters. Last quarter GDP growth was much lower compared to 7.7% GDP growth in the previous quarter and 8.4% GDP growth in the same quarter last year. The GDP growth was in line with the expectations and the drop was due to high inflation, high interest rate and global economic slowdown. RBI has recently lowered its GDP forecast to nearly 7.3% for the current financial year 2011-12 due to the same reasons.
Except the service sector, all the other sectors have witnessed either lower or negative growth and pulled down the overall GDP growth figure. Service sector grew by 9.3% in the second quarter which has helped to post a satisfactory overall GDP growth. Mining sector output declined by 2.9% in the second quarter compared to 8% growth in the same quarter last year. Manufacturing sector growth fell to 2.7% in the second quarter compared to 7.8% growth in the previous quarter. At the same time, agricultural and construction sector growth fell to 3.2% and 4.3% respectively in the second quarter compared to 5.4% and 6.7% growth respectively in the same period last year. It shows that better than expected Monsoon rain had also failed to push the agricultural growth in the second quarter.
The benchmark inflation has been at 9% level since more than a year and has become the biggest threat to Indian economy. RBI has hiked interest rates 13 times since last March 2010 to tame inflation, but failed to cool it down. High interest rate is threatening the economic and industrial growth of the Asia’s third largest economy. Industrial growth is struggling to recover amid high interest rate and borrowing cost, negative growth in the mining sector and dismal growth in the manufacturing is the example for the same. After this dismal performance of the industrial sector; RBI may pause hiking rates again and refrain from further monetary policy tightening.
Also the current euro zone debt crisis and global slowdown has led to high foreign cash outflow from the country. Indian Government is now looking at more economic and fiscal reforms to attract from FDI and FII inside the country to boost its economic activity. It has recently allowed FDI with cap of 51% in multi brand retail to attract more FDI and tame continuously increasing inflation.