The Indian economy would see in this fiscal year its weakest growth rate in the past 10 years as the policy gridlocks and global economic uncertainties weigh heavily on the country, Reuters reported Thursday.
India's gross domestic product (GDP) growth is expected to be at 6.3 percent in the fiscal year 2012-2013 and it would be at 7.0 percent in the next fiscal, according Reuters survey. Earlier, analysts had expected a growth rate of 7.1 percent in the current fiscal year and 8.0 percent GDP growth in the next fiscal year.
Even as the economy is struggling with slow growth rate and widening trade and fiscal deficit, the inflation figures are still high and the Reserve Bank of India and the government are left with little elbow room to ease the monetary policies.
The Indian rupee is highly volatile against the dollar. The rupee touched its all-time low against the dollar in June. The RBI has been averse to the industry demand to cut the interest rates to boost growth, as the inflation figures are high.
The current growth rate of 6.3 percent would be the slowest pace of expansion for the Indian economy in the past 10 years. In 2002-2003, the country grew just 4.0 percent.
The Reuters poll data show that the growth predictions for India have now been slashed in the six consecutive quarterly polls. All of the 17 analysts who contributed to the survey downgraded their growth forecasts for this fiscal year and the next.
The International Monetary Fund Tuesday sharply cut the growth forecast for India to 6.1 percent and 6.5 percent for this fiscal year and the next respectively.
Immediately after the global financial crisis India grew very rapidly but that recovery was to a very large extent propelled by domestic stimulus, both monetary and fiscal, said Leif Eskesen, economist at HSBC, Reuters reported.
A gradual pick-up in implementation of structural reforms will provide impetus to growth next year. It will also have a positive spillover effect for domestic and foreign investor sentiment, Eskesen added.
There has been strong demand from both the industry and the investors to undertake fresh reforms to boost foreign fund flow to the country. The global rating agencies and the foreign investors have alleged that the government inertia in policy level is ruining the investors' confidence in the economy.
The Indian government was forced to backtrack from many of its policy decisions due to the pressure from its coalition partners. India's ruling UPA coalition, led by the Congress party, consists of political parties that are ideologically different, constraining the government's policy decision making.
With the general election widely believed to happen in early 2014, the analysts are not expecting any major change in the policy level before that.
But since we can't expect significant reforms before the general elections and because these reforms take time to implement and pay off, we probably have to wait for a few more years before we're back to growth above 8 percent, Eskesen said.
The RBI will not be able to take any drastic steps in monetary policy level unless the inflation eases, which is unlikely to happen soon.
If growth slows, with inflation moderately high -- like in recent months -- the central bank will not feel compelled to take any drastic steps, said Andrew Kenningham, economist at Capital Economics, Reuters reported.