India’s GDP slows to 6.9% in 3Q11

India's Q3 2011 GDP growth slowed to 6.9% y-o-y (vs. 7.7% in the previous quarter) mainly due to a slowdown in domestic investments. Looking ahead, external demand weakness and tight monetary conditions will dampen growth. However, inflation is expected to stay elevated and keep the RBI on hold for an extended period.

However, growth in annual terms is partially depressed by the lower GDP base last year, which was revised down.

Nevertheless, the growth momentum has slowed. Looking at growth in seasonally adjusted sequential terms, the economy expanded 1.6% q-o-q sa (vs. 1.9% in Q2 2011), which was slightly below the historical rate of growth. However, this number needs to be read with some caution due to spotty revisions to the historical series, which distorts the seasonal adjustment.

By industry, agriculture growth eased to 3.2% y-o-y (vs. 3.9% in Q2 2011). Industry growth (2.8% y-o-y vs. 6.7% in Q2 2011) slowed sharply due to a contraction in mining (-2.9% vs. +1.8% Q2 2011) and a slowdown in manufacturing (2.7% vs. 7.2%).

However, 'Electricity, Gas & water supply' (9.8% y-o-y vs. 7.9%) picked up.

Overall services (8.7% y-o-y vs. 8.9% in Q2 2011) moderated slightly due to slowdown in 'trade, transport & communication' (9.9% vs. 12.8% Q2 2011). However, growth in construction (4.3% y-o-y vs. 1.3% Q2 2011), 'financing & business services' (10.5% vs. 9.1% Q2 2011) and 'community, social & personal services' (6.6% vs. 5.6% Q2 2011) picked up.

By expenditure components, private consumption moderated to (5.9% y-o-y vs. 6.3% in Q2 2011), government consumption picked up (4.0% y-o-y vs. 2% in Q2 2011) but investments contracted (-0.6% y-o-y vs. 7.9% Q2 2011). However, net exports improved significantly due to faster export growth (27.4% vs. 24.3% Q2 2011) and slower import growth (10.9% vs. 23.6% Q2 2011). The improvement in net exports alone contributed 2.9% to y-o-y growth.

Implications
India is slowing due to the tightening of monetary policy to bring inflation under control. However, the slowdown is driven by dip in investments, which can also be explained by the administrative hold up of investments, slow structural reform implementation, and a more uncertain global backdrop.

Looking ahead, growth is expected to remain muted as exports growth eases in response to slower external demand. This is already reflected in high frequency data on external trade.

While growth risks are rising, this may not necessarily lead to lower price pressures given that capacity constraints will linger, partly because of the slow pace of investment. Also, the weaker exchange rate does not help. This means, the RBI will have to keep rates on hold for an extended period of time.