India's growth sags to slowest in 3 years

The Indian government on Tuesday said that the country's economy is estimated to grow this financial year at its slowest pace in three years, at 6.9 percent, as a bout of monetary tightening takes its toll on investment amid weak global conditions.

Growth estimates for Asia´s third-largest economy in the current fiscal year to end-March have been cut several times from an earlier estimate of about 9 percent and the latest climb down beat forecasts of 7 to 7.5 percent growth for the full year.

A burgeoning fiscal deficit, a policy logjam in the government battling several corruption scandals and whims of allies and an aggressive central bank determined to curb inflation by hiking lending rates also compounded the drop in growth, analysts said.

Economists say the Reserve Bank of India´s (RBI) hawkish stance of monetary tightening since March 2010 has progressively reduced investment and has risked squeezing growth to levels last seen during the 2008-09 financial crisis.

India's economy, which touched a growth of 6.7 percent during 2008-09, grew at 8.4 percent for the last two years and was expected to have grown at 7.5 percent according to the government's mid-year economic review.

"There may be slow growth in the sectors of 'agriculture, forestry and fishing' (2.5%), manufacturing (3.9 percent) and construction (4.8 percent). The growth in the mining and quarrying sector is estimated to be negative (-2.2 percent)," the government said.

"The GDP in manufacturing sector is estimated at 3.9 percent during 2011-12 which is also consistent with the growth in IIP Index of manufacturing registering growth rates of 4.1 per cent during April-Nov 2011-12," it added in a statement.

The chairman of Prime Minister Manmohan Singh´s Economic Advisory Council, C. Rangarajan said that the government must give a signal to reduce fiscal deficit in financial year 2012-13, the budget proposals for which are expected to be unveiled in mid-March.

"The best policy option in these circumstances is strong economic growth, which can absorb the larger inflows without affecting stability," he said in Mumbai adding that pressure on the rupee will begin easing with the resumption of capital flows in the first quarter of 2012.

On Monday, global ratings agency Standard & Poor´s warned that that India´s sovereign rating may come under pressure if the government fails to arrest rising inflation, widening fiscal deficit and growth slowdown.

"Continuous loose fiscal policy or policy setbacks on the monetary, financial, and economic fronts that lower India´s medium-term growth prospects could result in a rating downgrade," S&P said in a report that upheld India´s current rating at BBB- with a stable outlook.