India GDP Preview: EconomyTo Grow At 4.7% in 2Q, As Falling Rupee, Current Account Deficit, Stalled Reforms Weigh On Growth

 
on August 28 2013 8:58 AM

The Indian economy is set to grow at 4.7 percent in the second quarter, marginally weaker than the 4.8 percent growth it recorded in the previous quarter, but economists expect the country’s growth to gather momentum in the second half of the fiscal year.

Asia’s third-largest economy, whose growth prospects only a few years ago led to it being dubbed as 'Incredible India' and 'India Shining,' is struggling to emerge from a slowdown brought on by a ballooning current account deficit, political instability and badly stalled reforms, all of which have driven away much-needed foreign capital, and brought the domestic currency to its knees.

“The Indian economy has been steadily decelerating for the past three years and is now growing well below its trend rate," Moody's Analytics said in a report, according to Business Standard.

According to the median consensus estimate by economists polled by Reuters, the country’s annual growth could clock 4.7 per cent in the April-June quarter, while analysts at Trading Economics peg India's gross domestic product, or GDP, to grow at 4.6 percent. The data is due to be released on Friday at 1.30 a.m. EDT.

India faces a multitude of problems on both economic and social fronts, as the country’s huge current account deficit, or CAD, is dragging down the economy and its currency – which is one of the worst performers among its Asian peers.

The country’s CAD at $98 billion, or 4.9 per cent of GDP, is the third-highest in the world in absolute terms, behind the U.S. ($473 billion) and the UK ($106 billion), according to a report by Morgan Stanley.

High imports of precious metals including gold, which many economists describe as dead assets, have contributed heavily to the deficit problem and the government’s desperate attempts to curb gold imports in recent months have failed to stem demand to any appreciable extent.

The slowdown in recent quarters has also been blamed on bottlenecks in the policy-making process, as an uneasy alliance of political parties with conflicting ideologies in the federal government has hampered the implementation of reforms and led to policy inertia.

As a result, investor confidence in the country's economy has dwindled, leading to fund outflows, which in turn have pushed the rupee down. The domestic currency, also buffeted by a global flight toward the dollar on worries of a tapering of the U.S. Federal Reserve's stimulus program, has fallen by about 7 percent so far this week, and has lost 25 percent of its value since the beginning of the year.

"The growth momentum was weak even before the latest bout of instability in the domestic markets and these risks have become starker after the measures adopted to arrest the currency depreciation," said Radhika Rao, an economist at DBS Bank in Singapore, The Economics Times reported.

The free fall in the value of the rupee over the past few weeks had prompted the Reserve Bank of India, or RBI, to tighten liquidity, leading to a credit crunch, a move which is widely seen to have backfired and adversely affected local markets.

Stubbornly high inflation is another major factor hurting India’s growth. India’s benchmark inflation, measured by the wholesale price index, rose to 5.79 percent in July, from an annual 4.86 percent in June. And, persistently high inflation has prevented the RBI from relaxing its key lending rates.

India recorded a growth of 5 percent in the 2012-13 fiscal -- nearly half of the 9.3 percent growth it recorded in 2010–11 and its slowest in a decade. However, global rating agencies expect the country’s economy to pick up momentum in the second half of the year.

"We forecast only a mild recovery in GDP growth to 5.4 per cent in 2013, before expecting a stronger recovery to take hold in 2014," Barclays said, in a research note. 

The government, which is keen to boost growth before the general elections in May 2014, has in the past dispatched key ministers abroad to win back the confidence of investors. Earlier this week, it also cleared stalled projects worth $28 billion in the energy, power and infrastructure sectors.

The International Monetary Fund, on Monday, said India’s GDP is likely to grow at 5.7 per cent in 2013 and move further up to 6.2 per cent in 2014.

On the other hand, RBI, in its monetary policy review of the first quarter, had cut growth estimates for 2013-14 to 5.5 per cent from an earlier estimate of 5.7 per cent, while the government, in February, had estimated a 6.5 per cent growth for 2013-14.

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