NEW DELHI -- India's economic growth softened to 7.1% for the three months ended in September, a slowdown from the previous quarter and a result that could spell trouble for Prime Minister Narendra Modi ahead of upcoming elections.
Blame was placed on factors such as the rupee's sharp depreciation and a liquidity crisis in the so-called shadow banking sector, which had been playing a big role in India's growth story but is now saddled with souring assets.
Still, the gross domestic product growth for the second quarter of the financial year outpaced neighboring China's 6.5% growth with India remaining the world's fastest-growing major economy, official data show.
Before the latest GDP figures were released on Friday, a Reuters poll forecast 7.4% growth, while a research report by the State Bank of India, the country's largest public-sector lender, said it expected a pickup of 7.5% to 7.6%.
These expectations were far lower than the previous quarter's GDP, which came in at a better-than-expected 8.2%.
Manufacturing grew 7.4% in July-September as compared with 13.5% in the previous quarter, while the mining sector contracted by 2.4% as against 0.1% growth in April-June. The agriculture and construction sectors registered 3.8% and 7.8% growth, respectively, compared with 5.3% and 8.7% in the first quarter, while electricity, gas, water supply and other utility services expanded 9.2% from 7.3% in the previous quarter.
The impressive first-quarter growth was also due to a favorable base effect, as expansion in the corresponding three months a year ago was much lower.
The latest number left economists disappointed. "There is a slowdown which is across the board," Soumya Kanti Ghosh, group chief economic adviser at SBI, told CNBC TV18. "Now a 7% growth rate looks a little bit difficult in the next two quarters."
In its report ahead of the GDP data release, the SBI said it based its less sunny expectations of 7.5% to 7.6% growth on slowing rural demand.
The report notes that commercial vehicle sales, domestic airline passenger numbers and cement production maintained double-digit growth during the quarter. It also points out that October data from a number of indicators suggest slowing growth and declining demand. "Of particular concern," the report says, "is that nonfood credit, bank deposits and sales of passenger and commercial vehicles have slowed down as compared to [the] previous month."
The trend, if it continues through March and the end of the fiscal year, could hamper Prime Minister Modi, who will seek a second five-year term in general elections due by May.
Modi's government has been taking flak for two disruptive policies. In November 2016, it took high-value bank notes out of circulation in an effort to force anyone with hidden wealth to deposit their cash at banks. In July 2017, a goods and services tax took effect, temporarily slowing the growth of Asia's third-largest economy.
The prime minister's opponents have also criticized the government for not doing enough to create jobs. India has a population of over 1.25 billion, and more than 12 million people enter the job market every year. According to the Centre for Monitoring Indian Economy, the unemployment rate rose 6.9% in October, its highest point in two years, with 29.5 million people looking for jobs.