Economicgrowth in Asia's third-largest economy probably bottomed out in the quarter toMarch, when it eased to 5.3 percent from a year earlier, the slowest in nearlythree years. While weak demand from the West has hit Indian exports, theheaviest drag has come from government overspending and a lack of reformsneeded to spur investment, a point made by ratings agencies Standard &Poor's and Fitch Ratings, which have threatened to downgrade India's sovereigncredit rating to junk.
Toaddress those concerns, India has recently announced long-awaited reforms suchas raising the price of subsidised fuel to rein in the budget deficit andincreasing foreign investment caps in the retail, aviation and broadcastingsectors.
"Thesereforms will improve business sentiment and encourage domestic and foreigncompanies to invest in India, more than they would have otherwise have done,although (they) will not have a dramatically positive impact overnight onIndian economic growth," said Robert Prior-Wandesforde, the Director ofAsian economics at Credit Suisse in Singapore.
Thefull-year growth rate for the current fiscal was also slashed in the Reuterssurvey to 5.7 percent from 6.3 percent in the July poll. If realised, thatwould be the weakest yearly rate of growth in a decade. Growth predictions forthis fiscal year have now been cut in every poll since April last year andhighlight the perilous state of an economy which once roared with near-doubledigit growth rates.
Europe, Domestic Reforms Keys to Recovery
Part of the rebound in growth seen in coming quarters will also be due to the comparison with the year-ago figure, or base effect, which could obscure the actual strength of the recovery. "The March quarter was the bottom and we will see a modest further recovery from here," said Prior-Wandesforde. "Especially as we are entering a period when base-effects become very easy to compare with a period that was weak, so it has to be a awful lot weaker than it was last year, when the high interest rates were having maximum effect on growth."
The International Monetary Fund slashed its India forecasts, predicting growth of 4.9 percent this calendar year, down from a forecast in July of 6.1 percent. It pencilled in 6.0 percent growth in 2013. The poll consensus is for growth of 6.6 percent in the next fiscal year, but that could be in jeopardy if there is no resolution to the prolonged euro zone debt crisis, seen as a necessary catalyst for a global economic recovery.
"We expect a gradual recovery in growth next year, but this recovery is based on a continuation of pick up in reforms announced recently which is important for investment cycle," said Leif Eskesen, Chief Economist for India and ASEAN at HSBC in Singapore. "And also on a gradual stabilisation in global economic conditions which will have positive implications on exports."
More Easing on the Way?
The Reserve Bank of India has waged a prolonged and unsuccessful battle to bring down inflation, raising interest rates 13 times between March 2010 and October 2011. But in April this year, it surprised markets by cutting the main policy rate by 50 basis points to 8 percent to spur slowing economic growth. Since then, the Central bank has shifted the onus of reviving growth onto the Government.
Still, though inflation expectations were pushed up in the poll, economists predict another 25 basis points cut in interest rates to 7.75 percent by the end of this year, in line with a poll taken last month. "We need to see inflationary pressures dissipate before the RBI will be comfortable on cutting interest rates," said Eskesen. The poll consensus predicted inflation at 7.6 percent in the year ending March 2013 before easing to 6.9 percent the following year, both much higher than the 7.4 percent and 6.5 percent forecast in July's poll.
This article was originally published in the Stitch Times magazine, November, 2012.