India Economy – June 2013

Source: OPEC 7/7/2013, Location: Asia

After several starts, the government has undertaken a series of reforms since September 2012 to tackle the country’s burgeoning fiscal deficit and create new jobs. In late February the government presented its last major budget for the current parliamentary term for the fiscal year 2013–14 (April–March). The administration is attempting to balance its development priorities against the need for fiscal consolidation, and has set itself the ambitious target of cutting the budget deficit to the equivalent of 4.8% of the GDP in the coming year. It will be challenging to reach the target, which seems to be based on optimistic projections of revenue growth.

The pace of economic expansion slowed sharply in 2012–13, owing to a host of domestic factors, including weaker business and consumer sentiment, a poor monsoon season and tight credit conditions. Growth in private consumption (which accounts for more than one-half of the nominal GDP) is estimated to have slowed to 4.1% in 2012– 13, its slowest pace of expansion since 2004–05. Government consumption also decelerated to 4.1%, as the administration sought to narrow the fiscal deficit. The high cost of financing — given the high interest rates — appears to have held back investment growth, which is estimated to have decelerated for the second consecutive year, to 2.5%.

On a factor/cost basis, agricultural output growth — a large part of the economy — slumped to an estimated 1.8% y-o-y in 2012–13 owing to the poor monsoon season. Since September 2012, the government has taken a series of steps to boost the economy. These include moves to lower the public subsidy bill, to open up more sectors to foreign investment and to fast track approvals for infrastructure projects. It is expected these measures, combined with a loosening of monetary policy, will enable real GDP growth to rebound to around 6.0% in the 2013 calendar year.

Inflation remains a problem for the economy, also limiting the central bank’s ability to further stimulate the economy via monetary expansion. This was highlighted when it recently reduced its key policy rate by a further 25 basis points to 6.25%. While still at high levels, inflation fell in April to 9.4% y-o-y, after reaching 10.4% in March and 10.9% in February. Moreover, the government is attempting to pull back on its fuel subsidy bill by raising administered fuel prices, forcing bulk users of diesel (such as railways and industry) to pay market prices for fuel and allowing oil marketing companies to raise petrol prices.


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