Is there a way out for India's slowing economy?

Every day, the government’s aim of achieving economic growth of around 8 percent for the 12 months ending March 2012 is looking less and less likely.

In the latest piece of bad news, excise duty collections dropped for the first time in 16 months in September, according to a report in The Economic Times.

Excise duty collections - a tax on goods at the factory gate - fell 8 percent from a year ago in September, reinforcing a slowdown that has been evident in recent industrial activity and service sector numbers.

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In September, manufacturing output, represented by the HSBC Markit Manufacturing Purchasing Manager’s Index (PMI), fell to 50.4 from 52.6 the previous month. A reading above 50 indicates expansion, a reading below that indicates contraction.Making things worse, the services PMI also fell to 49.8, technically indicating a contraction in growth. That’s even more frightening since services account for about 60 percent of economic activity.

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That’s not all: corporate earnings growth is also cooling quite sharply. In a recent earnings preview note, Goldman Sachs said it expected growth in corporate revenues for the quarter ending September to slow to 19 percent from 25 percent a quarter ago. Net profit is also expected to expand in single digits - 9 percent - from 11 percent the previous quarter.

So far, the only bright spot remains direct gross tax revenues, which have jumped 26 percent for the five months through August. Yet most economists expect even that buoyancy to fade in the second half of the year given the floundering economic situation.

No wonder, research agency Crisil recently revised downwards its estimate of India’s economic growth to 7.6 percent for this financial year from its earlier estimate of 8 percent, citing a deteriorating investment climate and global economic uncertainty as the main reasons for the revision. The economy expanded by 7.7 percent in the quarter ending June, the first quarter of this financial year.

Will all this gloomy data persuade the RBI to hold off on interest rates? Seems unlikely, given the central bank governor D Subbarao has tried to used monetary policy primarily to clamp down on rising prices. But with inflation still high - above 9 percent - and nothing to suggest a reversal in this trend, the governor may not be done yet with hiking rates.

Interest rates have been raised by 350 basis points since March 2010. The next RBI policy meeting is on 25 October and perhaps another 25 basis point-hike (hopefully the last one) may be in store if the inflation number for September, out this week, shows no sign of calming.

If, however, inflation surprises us all and declines, the best we can hope from Subbarao is a pause in the rate-hiking cycle. Per se, that doesn’t do the economy much good because rates will still be at pretty high levels.

Growth is unlikely to get a kicker from RBI inaction alone.

For a bounce in growth, the government needs to get a move on economic reforms to boost the investment and spending climate.

At this point, the chances of that though look exceedingly slim.