India's economy posted its weakest growth in more than six years last quarter, a blow to the government as it exhausts all options to stem the fallout.
Gross domestic product rose 4.5% in the September quarter from a year ago, down from 5% in the previous quarter and compared with a median estimate of 4.5% in a Bloomberg survey of economists.
Core infrastructure industries' output declined 5.8% in October, the biggest contraction since at least 2005, data released separately showed Friday.
The slowdown in Asia's third-largest economy took a turn for the worst this year as consumers curbed spending, businesses held back on investments and export demand slumped. Having left much of the stimulus burden to the central bank early this year, Prime Minister Narendra Modi has recently taken bolder steps to reverse the decline, though the policy room for additional stimulus is narrowing.
"Domestic demand is displaying chronic weakness, with an apparent credit crunch afflicting wide swaths of the economy," Taimur Baig, chief economist at DBS Group Holdings Ltd. in Singapore, said before the GDP data. "Production and sales are under pressure, and public spending is running out of room due to poor tax collection."
In recent months, the government has slashed corporate taxes, set up a special real-estate fund, merged banks and announced the biggest privatization drive in more than a decade. The Reserve Bank of India has already cut interest rates by 135 basis points this year to the lowest since 2009, with economists predicting more easing to come next week.
The weak growth outlook and interest-rate cuts are weighing on the rupee, the worst performing currency in emerging Asia this quarter.
India was the world's fastest-growing economy until last year, posting quarterly growth rates of as high of 9.4% in 2016. A crisis among shadow banks - a key source of funding for small businesses and consumers - weak rural spending and a global slowdown have since conspired to bring down growth steadily.
"The onus is on the government to do the heavy lifting," Devendra Pant, chief economist of India Ratings and Research, a local unit of Fitch Ratings Ltd., said before the data were released. He expects the government will miss this year's fiscal deficit target of 3.3% of GDP as it boosts spending while tax revenue falters.
Weak rupee prompting global funds to dump India bonds
India needs all the help it can get as it tries to develop its small corporate bond market to overcome a cash crunch that's hobbled economic growth.
Weakness in the rupee, though, is making that harder. Foreign investors spooked by the currency's slide sold 74 billion rupees ($1.03 billion) of local notes more than they bought this month, the most since April, dragging their holdings down to a 2.5-year low of 1.9 trillion rupees.
Cash-strapped businesses struggling to get financing amid a shadow banking crisis would no doubt like to see foreigners taking out their checkbooks more - global investors make up only a small proportion of overall local corporate bond holdings. But rising defaults, a slowing economy and a sovereign outlook downgrade by Moody's Investors Service have given global funds further pause.
The rupee is the worst performer among emerging market peers in Asia this half. That's crimped flows from offshore into corporate bonds.
It's a different picture for the nation's stock market as investors expect to profit more from recent corporate tax cuts. Foreigners were net buyers of $3 billion of Indian equities this month, headed for the highest since March. Modi's steps to revive economic growth aren't assuring many corporate debt investors.
Moody's and S&P Global Ratings have flagged risks that the troubled shadow lending sector will worsen a prolonged credit squeeze.
Still, some yield-starved international fund managers are bargain hunting for Indian corporate debt - it's just that they're going for dollar bonds, which preclude the need for currency hedges. That's helped issuance of foreign-currency securities by Indian borrowers reach a record in 2019.