India growth holds below 5% as policy logjam hurts economy

Economy has floundered as protests over alleged graft in government disrupted parliament, impeding bills seeking to lure foreign capital, simplify taxes and provide more land for industry.

The rupee is down about 4.8% this month, the most among 11 Asian currencies tracked by Bloomberg, threatening to stoke price pressures. Wholesale prices rose 4.89% in April from a year earlier, a 41-month low, while the consumer- inflation index climbed 9.39%.

Reserve Bank Governor Duvvuri Subbarao reduced interest rates in January, March and May by a combined 75 basis points to 7.25% as the government pared the budget deficit to tackle inflation. He signaled after the May 3 cut that the nation has almost no space left to ease further.

Finance Minister Palaniappan Chidambaram said after today’s report that he’s confident India can expand 6% or more in 2013-2014. The budget gap last fiscal year was 4.9% of GDP, he said in New Delhi, narrower than a February estimate of 5.2%.

Trailing China

India’s expansion last quarter trailed neighbors from China to Indonesia and the Philippines, while exceeding more subdued performance in advanced economies such as Europe and the U.S.

The government’s record is set to be tested in elections due by May 2014. Policy changes will slow after September this year as the vote nears, according to Nomura Holdings Inc.

Agricultural output rose 1.4% in the three months through March from a year earlier, today’s data showed. Manufacturing expanded 2.6%, while construction gained 4.4%. Mining fell 3.1%.

Singh is grappling with allegations that he has let corruption fester after separate probes led to the dismissals of the law and railways ministers.

Parliament ended two days early in May as opposition parties demanding the men’s resignations blocked proceedings.

Bills to reduce restrictions on foreign investment in the country’s pension and insurance industries, overhaul the 1894 colonial-era Land Acquisition Act and help implement a uniform goods and services tax to encourage commerce are stalled.

Subdued Investment

Capital-goods output, an indicator of spending on factories and machinery, fell for nine of the 12 months through March. Foreign direct investment slid about 21% to $36.9 billion last fiscal year compared with 2011-2012, government data shows.

The current-account gap was $32.6 billion in the quarter ended Dec. 31, on gold and oil imports and subdued exports.

The Reserve Bank has said the imbalance is the biggest risk to the $1.9 trillion economy. Subbarao said May 4 that any unwinding of “extraordinary quantitative easing” in advanced nations may affect the capital flows needed to finance it.

Singh began changes in September to spur growth and avert a credit-rating downgrade. The steps included liberalization in the retail and aviation industries, faster approvals for public works and cutting a levy on overseas buyers of local bonds.

Finance Ministry advisers forecast as much as 6.7% expansion in 2013-2014. Companies from Unilever to Etihad Airways PJSC recently announced plans to invest in India, wagering the spending power of 1.2 billion people will revive.

“Any turnaround in the weak economic momentum remains dependent on the government’s success in easing infrastructure bottlenecks and hastening further reforms,” said Rahul Bajoria, an economist at Barclays Plc in Singapore.

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