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India Economy - January 2013

Source: OPEC 2/7/2013, Location: Asia

India’s economy slowed further in the three months to September 2012, adding to the challenges facing the Government as it struggles to push controversial economic reforms through Parliament. Year-on-year growth in Asia’s third-largest economy is believed to have declined to 5.5% on an annual basis.

This would be one of the country’s weakest years for economic growth for a decade. The near-term outlook remains challenging with sticky inflation, sluggish growth and high fiscal and current account deficits. The Federation of Indian Chambers of Commerce and Industry questioned market assumptions that growth had bottomed out, given the sluggishness of manufacturing, indicating that they saw little reason for optimism that growth would re-accelerate next year. The problem is that, unlike many other emerging economies, India has little room for policy stimulus. Nevertheless, the prospects for the economy remain robust. Indian financial markets ended 2012 in a buoyant mood amid predictions that the economy would recover from its lows in the coming year. Stocks rose to a 19-month high.

Prime Minister Manmohan Singh and his new Finance Minister, Palaniappan Chidambaram, have launched a series of economic reforms in the past four months to try to revive foreign and domestic investment while cutting the fiscal deficit. But their drive to privatize state companies and open sectors such as retail and insurance to greater foreign investment has met stiff resistance from opposition politicians preparing for a general election in early 2014. Mr Singh’s Government has been obliged to agree to a non-binding vote in Parliament on its plans to allow foreign direct investment of up to 51% in big city supermarkets and department stores in states where the authorities allow it. While the recent reforms are a major positive first step, the continued momentum in reform is essential to tackle India’s gaping fiscal deficit, financial sector weakness, stifling bureaucracy, power sector deficiencies and infrastructure shortfalls.

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