Growing at its slowest pace in nearly three years, India’s economy in the third quarter (October-December) expanded only 6.1 per cent, lower from 6.9 per cent in the previous quarter, and continued poor showing by mining, manufacturing and farm sectors renewed fears that the full year growth may languish much below government’s expectations.

Economists cited government’s policy paralysis, prolonged high inflation and soaring interest rates as major reasons for slowing investment and hence slowing growth.

The official data released Wednesday showed a sharp fall in manufacturing at a meagre 0.4 per cent in the third quarter compared with 7.8 per cent in the same quarter a year ago, while mining contracted to stand at (-)3 per cent.

But, the growth in farm sector at 2.7 per cent compared to 11 per cent in corresponding period last year came as a real surprise despite the country having a record Kharif output this season.

Dampening effect

Experts said it may be possible that some of the other sectors like horticulture may have seen lower production numbers, dampening the growth in the farm sector.

The services was the only sector, which showed a better performance at 8.9 per cent but economists said that given the underlying weakness of the other sectors like  industry, manufacturing and agriculture, services may not continue with this growth in the quarters ahead.

“If the services sector also comes in little weak and the ongoing weakness in the mining and industry continues, the fourth quarter may not be able to achieve 6.9 per cent, which is required to maintain this growth rate for the year as a whole,” Director General of FICCI Rajiv Kumar said.

The slowdown in investment and in the manufacturing sector was actually worse than the slowdown witnessed during the 2008 financial crisis.

Capital formation

According to the data, the gross fixed capital formation, which refers to the share of investment in production, shrank for the second quarter running from a year ago level. It stood at 1.2 per cent indicating bleak investment outlook.

“In such a situation, all policy levers should be used to drive a revival in the economy. Project clearances should be hastened, implementation of the manufacturing policy should begin by identifying specific zones where industry can invest and interest rates should be reduced,” CII Director General Chandrajit Banerjee said.

Economists were also of the view that high fiscal deficit was boosting consumption demand and crowding out investments.

“Unless action happens from the government's side and some amount of interest rate easing from the Reserve Bank of India’s side, the growth cannot pick up at the desired level of 7 per cent for the year as a whole,” Harish Galipelli of Chennai-based brokerage firm JRG Securities, said.

He said that the private investment is waiting to see real results in the coal, power and infrastructure sectors and hoped that some action will be taken around the budget time.

Government has pegged this year’s (2011-12) economic growth at 6.9 per cent but the current indicators such as today’s lower GDP numbers, the core sector data, which came only at half a per cent and the expectations of a bleak industrial production number later next month, may put a dampener on government’s expectations, analysts said.