Economic growth slows

India's economy expanded 7% in the first quarter, well below expectations and slower than the preceding three-month period, putting a dent in the Modi government's optimism about a strong recovery and adding to pressure on the central bank to cut rates. But India is still on course to overtake China's growth rate to become the world's fastest-growing major economy .
While China's economy expanded 7% in April-June quarter, the consensus expectation for India's GDP growth had been 7.4%. The government has been battling disappointment over not living up to its promise to get going on reforms, failing to get key legislation passed because of Opposition resistance. This includes the land acquisition amendment and legislation related to the goods and services tax (GST). Government spending, which has been stepped up in order to make up for muted private investment, doesn't seem to have filtered through into the economy yet.
Separately released data showed that the government has spent 36% of its capital budget in the first four months of the current fiscal itself. In other disappointing news on Monday, the core sector index ­ which measures the output of eight infrastructure industries ­rose a modest 1.1% in July, pointing to the challenge facing the government in getting the investment cycle going. Meanwhile, a worsening monsoon with a rainfall deficit of 11% has raised concerns about rural demand with the festive season round the corner.

The Reserve Bank of India will face increased pressure to cut rates with the data showing below par growth and inflation having slowed.
GDP at current prices, which includes the effects of inflation, was up only 8.8% compared with 13.4% in same quarter last year, suggesting hardly any inflation pressures.
RBI has cut the policy rate by 75 basis points since January amid a sharp fall in consumer inflation and negative whole sale inflation for many months, opening it up to rising criticism that it's overcautious. The government has repeatedly hinted at the need for rate cuts, seeing it as the only lever that can get consumer demand going as its own hands are tied be cause of fiscal constraints.
The slowdown is consistent with private forecasts that see India slowing from 7.3% growth in FY 15 because of the deceleration in the Chinese economy that's likely to pull down overall global growth.
Ratings agency Moody's has already lowered its growth estimate for the year to 7% from 7.5% estimated earlier, citing concerns on reforms and other factors.
Going forward, the signals are mixed. While corporate results have been lacklustre, indirect tax collections point to some strength in manufacturing, further substantiated by strong car sales in July. The government is sticking to its 8% target for the year and on Monday pitched for a ratings up grade from Standard & Poor's, citing India's high growth and strong fundamentals. S&P has a stable outlook on India's rat ing of BBB-, which is barely investment grade.
The silver lining in the GDP data was a 7.1% rise in gross value added (GVA) in the quarter compared with 6.1% in the preceding period, suggesting an improvement in underlying growth momentum. Economists are confident of growth picking up ahead once the impact of softer commodity prices begins to raise corporate profits and boost spending.
The farm sector, in which a contraction had been seen, did better than expected with gross value added (GVA) rising 1.9% compared with 2.6% in the year earlier.
Trade and hotels was the best sector with growth of 12.8% while manufacturing posted strong 7.2% expansion in GVA.
Gross fixed capital formation rose 4.9% in the first quarter from a year ago, suggesting some pick-up in investments.