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Indian government dampens hopes of economic stimulus

By AFP
media India's economic growth has slowed in the past three consecutive quarters AFP/File

Indian markets fell on Friday after a top official dampened hopes of a stimulus package to support a misfiring economy and ease a liquidity crunch in Asia's third-largest economy.

India's economic growth has slowed in the past three consecutive quarters, losing its status as the world's fastest-growing major economy to China, with unemployment at its highest since the 1970s.

Industry figures have been calling on newly re-elected Prime Minister Narendra Modi's government to provide more of a fiscal boost as signs multiply that numerous sectors are suffering a painful slowdown.

But Krishnamurthy Subramanian, the government's chief economic advisor, suggested on Thursday that state intervention creates a "moral hazard" and is "anathema to the way the market economy functions".

Reportedly under pressure from the government, India's central bank in August cut interest rates for the fourth time this year to a nine-year low in an attempt to boost growth.

The automotive sector is particularly stricken, with car sales plunging 31 percent in July, the ninth consecutive monthly drop, prompting manufacturers to halt production at some plants.

India's largest biscuit maker Parle Products warned this week that it might have to lay off up to 10,000 workers if the government doesn't cut sales taxes.

Part of the problem is that India's banks are reluctant to lend following a slew of bad loans, with the deputy head of government think-tank Niti Aayog calling for Modi's government to "take steps that are out of the ordinary".

"For the last 70 years, we have not faced this kind of a liquidity situation. (The) entire financial sector is up in a churn and nobody is trusting anybody else," Rajiv Kumar said.

Gross domestic product (GDP) for the world's sixth-biggest economy grew 5.8 percent in the final quarter of 2018, down from 6.6 percent in the previous quarter.

Economists at Nomura predicted this week a further slowing of momentum, forecasting growth of 5.7 percent in the first three months of 2019. GDP data are due next Friday.

Shares fell sharply on Thursday on Subramanian's comments with the Sensex index dropping almost 600 points. On Friday morning the index fell almost 100 points before recovering slightly.

 
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