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India Economy - December 2012

Source: OPEC 1/12/2013, Location: Asia

India’s economy decelerated for a fourth successive quarter in 3Q of 2012, signaling a downward move toward the long term trend of the country’s economic growth. Agricultural production is likely to suffer further on account of the sub-par monsoon, while government spending will be restrained by a shortfall in revenue. On the other hand, infrastructure investment is likely to get a much needed boost as the government finalizes plans for the National Investment Board.

Exports also are believed to increase in coming months on the back of slowly improving global economy. However, a main obstacle in the way of public investment expenditure to boost aggregate demand has been the huge budget deficit that amounts to 6% of GDP in 2012. The government has stepped up effort to rein in budget deficit but reducing the budget deficit in the short run could be hard to achieve. Although policymakers as well as lawmakers are increasingly concerned about a ballooning budget deficit and its adverse effects on economic growth, it is obvious that elevated inflation levels would make it very difficult to push for bold and far-reaching fiscal reform, including raising the subsidized fuel prices and privatization of governmentowned companies in the short-term.

According to the EIU (December 2012) non-seasonally adjusted factory output contracted by 0.4% y-o-y in September. India’s industrial production data are subject to revision and should therefore be read with some caution. Capital goods output declined by 12.2% y-o-y, marking a slight improvement over the average contraction of 13.2% in the earlier quarter. High nominal interest rates continue to deter capital investment and persistent inflation means that the central bank is unlikely to ease monetary policy. Although investor and business sentiments received a boost from a recent bout of economic reform, these measures are yet to be enacted in full.

The government is aiming for a budget deficit of 5.3% for the current fiscal year and to reduce it to 3.0% by fiscal year 2016/17. Although the fiscal consolidating plan lacks details, analysts see the move as a step in the right direction. The central bank has called for credible deficit reduction before it will consider further interest rate cuts. However, the central bank did reduce bank’s required ratios to make more liquidity available for investment and expansion of economic activities. With wholesale inflation accelerating to 7.8% y-o-y in September, reaching a 10-month high, there is limited scope for further monetary easing. Our estimate for Indian economic growth for this year is thus downgraded to 5.5% from the previous 5.7%; and considering the huge potential of the economy, we think it could rebound to higher rate of growth approaching to 6.6% next year.

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