India Economy – July 2013

Source: OPEC 8/19/2013, Location: Asia

The current parliamentary term ends in May 2014, although there is growing speculation that polls may be held early. The government's budgetary strategy has been repeatedly blown off course by a series of unfavourable developments since 2008, from the global financial crisis to the recent domestic economic slowdown, exacerbated by Congress's fiscal profligacy. As a result, federal government deficit widened from the equivalent of 2.5% of GDP in the fiscal year 2007/08 (April–March) to 5.7% in 2011/12.

On 3 May, the Reserve Bank of India (RBI, the central bank) cut its main policy interest rate — the repurchasing (repo) rate — by 25 basis points for the third time since January; the rate now stands at 7.25%. The central bank was prompted by a steady deceleration in wholesale price inflation as well as by sluggish economic performance in recent months. However, with consumer price inflation remaining elevated and the current account deficit at historical levels, the RBI highlighted the limited scope for further monetary easing.

The GDP growth forecast for 2013 was revised from 6% in June to 5.6% in July due to two important issues. First is the development of the rupee, which has fallen sharply in the past few weeks, potentially lifting inflation and limiting the RBI‘s ability to loosen its monetary policy. Second is the current account deficit; while it has narrowed to 3.8% of GDP in Q1 from 6.7% in the previous quarter, it remains significantly in negative territory.

The pace of economic expansion slowed sharply in 2012/13, owing to a host of domestic factors, including capacity constraints, weaker business and consumer sentiment, and drought in parts of southern and western India. Growth in private consumption (which accounts for more than one-half of nominal GDP) is estimated to have slowed to 4.1% in 2012/13, its slowest pace of expansion since 2004/05. Government consumption is also thought to have decelerated to 4.1%, from 8.5% in 2011/12, as the administration sought to narrow the fiscal deficit. These measures, combined with a loosening of monetary policy, are expected to enable real GDP expansion to rebound to about 6.0% in 2014.

Both consumer and wholesale price inflation eased in April, led by a moderation in food price rises. Wholesale price inflation slowed to a 41-month low of 4.9% y-o-y, from 6% in March, while consumer price increases decelerated from 10.4% to 9.4%. The RBI acknowledged that WPI inflation pressures have moderated meaningfully but in line with projections. However, it indicated that ?upside pressures on the way forward from the pass-through of rupee depreciation, recent increases in administered prices, and persisting imbalances, especially relating to food, pose the risk of second round effects.


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