India's economy slows amid growing tensions with Pakistan

Indian labourers selecting Mosambi fruits, also called sweet oranges, at Gaddiannaram fruit market, Hyderabad. India's economy is now facing weaker domestic demand, while friction with nuclear-armed Pakistan also threatens to hurt foreign investments
Indian labourers selecting Mosambi fruits, also called sweet oranges, at Gaddiannaram fruit market, Hyderabad. India's economy is now facing weaker domestic demand, while friction with nuclear-armed Pakistan also threatens to hurt foreign investments and overall business sentiment.PHOTO: AGENCE FRANCE-PRESSE

MUMBAI • India's economy slowed considerably last quarter, with little sign of a quick recovery amid rising political tensions with Pakistan and weaker global demand.

Gross domestic product (GDP) rose 6.6 per cent in the three months to December from a year ago, lower than the 6.7 per cent median estimate in a Bloomberg survey and down from a revised 7 per cent in the previous quarter.

Simmering tensions between the nuclear-armed rivals India and Pakistan have the potential to hurt foreign investments and sour business sentiment in India's economy - one of the fastest-growing in the world - as it also faces weaker domestic demand and a global slowdown.

That may give the Reserve Bank of India (RBI), under new governor Shaktikanta Das, reason to cut interest rates again after last month's surprise easing.

A 19-month low in inflation, coupled with weaker growth, "creates space for further cuts", economists at Citigroup, led by Mr Samiran Chakraborty, said in a note.

Relations with Pakistan soured this week after India accused its neighbour of being responsible for a major terrorist attack in Kashmir, which was followed by tit-for-tat airstrikes between both countries.

Pakistan has struck a conciliatory tone for now, offering to release a captured Indian pilot.

"This comes at a tricky time for both sides, as India heads into the general elections in April-May 2019, while Pakistan is in a tenuous economic position," said Ms Radhika Rao, an economist at DBS Group in Singapore.

Tensions are likely to overshadow the growth data, she added.

Waning consumer demand has dampened momentum in India's economy, where domestic spending makes up about two-thirds of GDP.

Growth in government consumption slowed last quarter, while exports and investments held up, data from the Central Statistics Office showed.

The government sees no cause for concern in the GDP estimate, Economic Affairs Secretary Subhash Chandra Garg said yesterday. The reading, the slowest in six quarters as per revised official data, came on the back of a higher base, he added.

For the past two quarters, domestic passenger vehicle sales growth - a gauge of urban demand - eased. Cement production, a measure of construction activity, abated slightly.

Purchasing managers' indexes also show activity in the dominant services sector has been cooling.

As the government cuts back on capital expenditure in its latest budget to curb the fiscal deficit, economists see more sluggishness.

"The slackness in government capital expenditure ahead of elections tends to have a lagged impact, affecting growth in the following quarters," said Ms Teresa John, economist at Nirmal Bang Equities India.

A benign inflation environment gives policymakers room to cut interest rates again. Consumer price inflation is close to two per cent; core inflation, which strips out volatile food and fuel costs, has begun to ease.

The measures are expected to converge in the coming months as the economy shows more signs of a slowdown. The RBI targets headline inflation at 4 per cent.

"We continue to believe that fundamentals do not support any meaningful increase in inflation," said Bank of America Merrill Lynch chief economist Indranil Sen Gupta.

"Tight liquidity reins in demand-pull inflation. Cost-push inflation is contained by falling commodity prices."

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A version of this article appeared in the print edition of The Straits Times on March 02, 2019, with the headline 'India's economy slows amid growing tensions with Pakistan'. Print Edition | Subscribe