Following an already sub-par performance in the January-March period when real GDP expanded by a disappointing 4.8% (y-o-y), the economy continued to underperform in the three months to June. Real GDP growth came in below market expectations with a reading of 4.4% (y-o-y). The figure marks the slowest rate of increase in four years as the headline growth rate was dragged down by a contraction in mining and manufacturing. The weak GDP report has prompted industry leaders to call on the government and the central bank to take joint action to boost the economy. Pushing ahead with economic reforms is seen as essential to help lift growth and so far there has been limited progress on this front. India needs to restore investor confidence in the country and set out a long term plan to encourage capital inflows and attract foreign direct investment. Besides weak growth, policymakers are having to contend with high inflation and gaping deficits in the fiscal and current accounts. Although the government has tried to rein in its twin deficits with various measures, including cutting fuel subsidies, raising the import duty on gold and banning duty-free imports, these are seen as merely stop gap measures and are not considered far reaching enough by analysts. The lack of a credible policy response by the government in dealing with India’s economic woes has contributed to the slump in the rupee in recent months. With the currency hitting new record lows, the central bank was forced to intervene to provide support; restrictions on capital outflows were recently put in place to shore up the rupee.
In view of the latest weak GDP report, growth expectations have now been slashed to 4.9% for this year. Moreover, inflation remains an ongoing problem and forecasts have risen sharply this month, reflecting the persistently weak rupee.
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