Govt, businesses hungry for rate cut even as GDP growth seen outstripping China

Govt worried that companies are not investing enough, period of low inflation may be short-lived

The Modi government and businesses are pushing for an interest rate cut next week even though data on Friday may show output is expanding faster than China's, in the latest sign of concerns that the figures are masking weaknesses in the economy.

Gross domestic product in the three months that ended in March likely grew 7.3% from a year earlier, a Reuters' poll of economists found, outpacing China for the second straight quarter.
 

But New Delhi, worried that companies are not investing enough and that a period of low inflation may be short-lived, is nudging Reserve Bank of India Governor Raghuram Rajan to lower lending rates from 7.5% at a policy meeting on Tuesday.

The government's position reflects nagging doubts that a new way of measuring GDP introduced earlier this year, which boosted growth by several points, may have distorted the macroeconomic view.

For example, economists say weak corporate earnings and five months of falling merchandise exports -- which make up about 16% of the nearly $2 trillion economy -- are not reflected in the robust GDP figures based on the new methodology.

"We are not experiencing a high level of growth if you look at a variety of high-frequency indicators," said Rahul Bajoria, an economist at Barclays.

Bajaria said he expected a 25 basis-point rate cut at the June 2 meeting and said the RBI had a short window to help encourage growth.

"In the second half, inflation may pick up," he said.

For the 2014-15 fiscal year growth is expected at 7.4%, up from 6.9% in 2013-14, using the new series.

On Wednesday, Rajan met Finance Minister Arun Jaitley, who has publicly favoured a rate cut, citing falling inflation.

The RBI has already cut rates twice this year after inflation fell within its comfort zone, but it left them unchanged in April.

"We expect RBI should cut interest rates by 25 basis points. After that they will probably wait for the monsoon data before deciding whether there is more room for rate cut," Bajoria said.

WAIT AND WATCH

Prime Minister Narendra Modi, who completed one year in power this week, has taken steps to reduce corruption and opened more sectors for foreign investors -- contributing to a 39% jump in foreign direct investment in India last year.

A sharp drop in energy prices has brought down retail inflation and freed up government resources to spend on roads, ports and railways - measures aimed at reviving Asia's third largest economy in the medium term.

If Friday's GDP number matches the forecast, it will be lower than 7.5% growth in the previous quarter, and the lowest in three quarters.

For now, consumers are deferring spending. Along with lower rates, corporates, who have not yet pumped much investment in new projects, hope to see labour, land and tax reforms.

In May, the MNI India Business Sentiment Indicator, a gauge of the sentiment among companies listed on the BSE bourse, dipped to pre-Modi government levels of 62.3 from 63.9 in April, a Deutsche Borse survey said on Wednesday.

Many investors, however, remain optimistic.

"We believe that the combination of sustained reforms and our expectation of further rate cuts will help drive a steady acceleration in capex growth," Morgan Stanley said in a note to it clients on Wednesday.