India Economy - February 2013

On 17 December, the government put forward its Mid-Year Economic Analysis report for fiscal year 2012-2013 in parliament. The report lowered the government’s forecast for real GDP growth to a range of 5.7% to 5.9 % from a previous forecast of 7.6%.

However, the GDP growth for the current fiscal year was estimated to have been only around 5%. This is the lowest level for a decade and is the result of sluggish activity in mining, farming and manufacturing, according to a recent official forecast that has surprised investors and disappointed the government. In a release on Thursday, the Central Statistics Office (CSO) said Indian GDP was expected to grow only 5% in the year to 31 March, down from 6.2% the previous year and nearly a full percentage point below recent predictions by government ministers.

Meanwhile, the Reserve Bank of India (RBI) on Tuesday cut the country’s benchmark interest rate by 25 basis points (bp), a move that will bring relief to the Congress-led coalition government as it struggles to return the economy to higher growth. The RBI also said in a statement that it would cut the cash reserve ratio — the share of deposits that banks must hold at the RBI — by 25 bp to 4%, a surprise move that will release Rs 80 bn ($3.4 bn) of extra liquidity into the banking system.

The interest rate cut, from 8% to 7.75%, which was anticipated in the financial markets, was the first in nine months. It could mark a turning point for the Indian economy, which has suffered from a sharp fall in growth from more than 8% to around 5% and is now afflicted with high twin deficits in the budget and the current account. According to Mr. Subbarao, the RBI’s governor, “it is critical now to arrest the loss of growth momentum without endangering external stability. The moderation of inflation conditions provides the opportunity for monetary policy to act in conjunction with fiscal and other measures to stem the growth risks."

Persistently high consumer price inflation reached 10.6% in December, largely because of rising food prices, but headline wholesale price inflation fell to 7.2% last month, down from 8.1% in September.

India’s finance minister recently travelled to Hong Kong and Singapore, and is now in Europe to tell investors that his government is determined to entrench reforms aimed at encouraging investment. Independent economists agree that Indian growth is likely to pick up in the months ahead, although they express concern about the deficits and doubt whether the government will be able to curb spending ahead of a general election due in 2014. A gradual recovery in growth is expected as structural reforms inch forward and the implementation of infrastructure projects picks up.