Slow business, uncertainty: Worst may not be over for economy

Bangalore: India’s ailing economy is likely to remain under pressure from weak domestic and foreign demand for some time, while uncertainty ahead of elections next year is expected to keep investors and businesses at bay, according to a Reuters poll.

The poll of 24 economists showed gross domestic product (GDP) will grow 4.7 percent in the fiscal ending next March after expanding 5 percent in the previous year, which was the weakest since 2002/03.

That consensus marks a sixth consecutive downgrade for this fiscal year, and is well below 5.6 percent seen in the last poll in July.

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Although the forecasted rate is better than that of many economies around the world, it is a far cry from the almost double-digit growth seen in recent years.

“Fundamentally India is not in a bad place but it’s surrounded by the worst kind of risks emerging at the same time,” said Vishnu Varathan, an economist at Mizuho Bank in Singapore.

Similar to the poll, the World Bank sharply lowered its forecast for Asia’s third-largest economy to 4.7 percent from 6.1 percent for the current fiscal year, citing a slowdown in manufacturing and investment.

Private surveys show new business is drying up, underlining the lack of momentum in the economy, which grew at its weakest quarterly pace in over four years in the first three months of the current fiscal year.

“There aren’t too many growth catalysts present at the moment. Consumption is slowing and investment spending has slowed significantly in the past several quarters,” said Radhika Rao, an economist at DBS in Singapore.

ELECTION RISKS

Upcoming general elections, due by next May, are compounding uncertainties.

Both the ruling Congress party and the main opposition Bharatiya Janata Party (BJP) are expected to fall short of a majority.

That means India may be heading for a coalition dependent on regional parties, which could spook investors further as regional leaders often hold policy hostage to their local agendas.

Indeed, the inability of Prime Minister Manmohan Singh’s government to push through pending reforms on political gridlock has weighed heavily on investments and business confidence.

“We are hoping that investments are not held back from now until the elections but in some degrees it is happening,” said Mizuho’s Varathan.

“Investors remain quite wary about where to place their chips, so on that note I don’t think it is going to be a stellar pick up this year or early next year, either,” he added.

Weak public finances have also constrained the option of pump-priming the economy and weighed on the rupee currency, which lost nearly 20 percent at one stage this year and hit a series of record lows.

India’s high current account deficit has made it vulnerable to a surge in capital outflows from emerging markets and that is expected to weigh on the rupee in the coming year.

However, the poll showed the current account deficit is expected to ease a little to 3.7 percent for this fiscal year and the next.

Earlier this month, Finance Minister P. Chidambaram told Reuters that he will not allow the fiscal deficit to exceed 4.8 percent of GDP, underlining that an austerity drive will not be blown off course by the elections.

Eight of 10 economists agreed that the government will not exceed its planned market borrowing.

Wholesale prices - India’s key inflation gauge - are forecast to average 6 percent for this fiscal year and next, remaining stubbornly above the central bank’s perceived comfort level of 5 percent.

That would prevent the Reserve Bank of India from taking any measures to shore up the economy.

The central bank surprised markets in September by hiking the repo rate by 25 basis points (bps) to 7.50 percent to signal its resolve in trying to control rising prices.

Economists expect a further 25 bps hike by the end of December.

Reuters