Falling rupee a sign of deep trouble

The statistical evidence is piling up that India's economy may be in worse shape than had been first thought.

The country's economy slowed in early summer to its weakest pace since the bottom of the global economic downturn in 2009, government statistics, released on Friday, showed.

The Central Statistics Office in New Delhi said the economy grew 4.4 per cent in the quarter ended June 30, well below economists' expectations of 4.8 per cent. The quarter was the weakest since output grew 3.5 per cent in the March quarter of 2009.

The accumulating signs of economic distress - slower growth, a widening current account deficit, higher oil prices and rising inflation in general - suggest that the month-long fall of the Indian rupee in currency markets may be a symptom of fundamental troubles in the Indian economy, and not just part of the broader difficulties experienced by Asian emerging market currencies in recent weeks.

Hints that the Federal Reserve in the US may soon shift to a tighter monetary policy have prompted global investors to shift billions of dollars out of financial markets from Sao Paulo to Jakarta to Mumbai, eroding the value of local currencies in developing economies. The Indian rupee has fallen the fastest of any emerging market currency in the last month, down 8.1 per cent.

Broader investor disenchantment with emerging markets has been compounded by worries about India's economy, the third-largest in Asia after China's and Japan's.

Hardest hit have been the manufacturing and mining sectors. A court-ordered halt to most iron ore mining across India for environmental reasons has hurt steel and other sectors; state governments have been raising taxes on the sector, and broader demand has begun to falter.

"The fact is, yes, the manufacturing sector has slowed down," said Raj K. Singh, the chairman and managing director of the Bharat Petroleum, an oil-refining and marketing company that is two-thirds owned by the Indian government and is one of the country's largest businesses.

The data was released after stock market and currency trading had ended for the day, despite government promises to stay with the regular Friday morning release. After a week of considerable volatility, the rupee and the Mumbai stockmarket both had showed modest gains earlier on Friday. India enjoyed annual growth of 8 per cent to 9 per cent in the years leading up to the global financial crisis but has struggled to reach 6 per cent since then despite heavy government spending and large fiscal and trade deficits.

Mr Singh voiced concern about a 7.2 per cent drop in nationwide diesel consumption during the first three weeks of August from a year ago. Nationwide diesel consumption was also down 5.9 per cent in July from a year ago, but heavy monsoon rains have limited the need for diesel in irrigation pumps, making the comparison less clear, Mr Singh said.

Rohit Dawar, the leading diesel demand expert at the Petroleum Ministry in New Delhi, said that diesel consumption had been artificially inflated in July and August last year by a peculiarity in government fuel subsidies - since removed - that temporarily made it cheaper to burn diesel instead of other fuels in industrial boilers.

Even allowing for all of these factors, however, "there is a slight slowdown" in diesel demand recently, Mr Dawar said.

Plentiful monsoon rains, a key indicator for the Indian economy for thousands of years, have produced lush fields that could yet help stabilise broader measures of the economy in the coming months and forestall a steeper slowdown. While World Bank data shows that value added in agriculture is only one-sixth of the economy these days, a good harvest could still play an outsized role in limiting recent increases in food prices.

Inflation is likely to remain a problem, though, given that India relies almost entirely on imported oil, which becomes more expensive with each drop of the rupee.

"Prices are rising for everything - petrol is more expensive, vegetables are more expensive," Bharat Hirji Gada, a Mumbai shopkeeper, said.