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India's economy probably recovered slightly in Q2

November 29, 2013 09:27 IST

India's economy probably recovered slightly in Q2

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Rajesh Kumar Singh in New Delhi

India's economic growth probably picked up slightly in the September quarter, but weak investment levels have tempered hopes that strong rural demand and a rebound in exports will drive a sustained recovery ahead of elections due early next year.

A Reuters poll of 40 economists showed gross domestic product (GDP) likely expanded 4.6 per cent year-on-year, only two basis points above the previous quarter, which was the lowest in four years.

India's statistics office will release the data on Friday.

If the forecast materialises, it would mean the fourth successive quarter of economic growth below 5 per cent, far below the 8 percent the government says is needed to reduce poverty and provide jobs for its burgeoning young population.

"A combination of weak investment, high inflation and tight monetary policy would not let India's economic recovery gather steam anytime soon," said Miguel Chanco, Asia Economist at Capital Economics in Singapore.

The ruling Congress party is pinning its hopes on a growth rebound to help win back voters in a national election expected by April. Opposition prime ministerial candidate Narendra Modi has made the depressed economy a central plank of his campaign.

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Photographs: Reuters

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After a successful decade of chaperoning Gujarat state's economic growth, Modi is viewed by some as the saviour of the country's battered growth story.

Economic growth virtually halved in two years to 5 per cent in the fiscal year that ended in March -- the lowest level in a decade in which Congress has dominated Indian politics. Most economists surveyed by Reuters last month expect the fiscal year to March 2014 to be worse.

A pickup in rural consumer spending after a strong monsoon raised farm yields and a rebound in merchandise exports have spurred hopes among India's policymakers that the worst may be over.

The monsoon also replenished hydroelectric reservoirs, leading to higher electricity generation.

But the economy is facing headwinds from other quarters. Persistently high inflation has suppressed consumer demand in the urban areas that drive India's economy, and businesses remain wary about expanding their capacity in a situation akin to stagflation.

Looming national elections expected by April next year are also credited with a dampening effect.

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Photographs: Reuters

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Prime Minister Manmohan Singh has expedited clearances for big ticket infrastructure projects but many businesses now prefer to wait until the next government is formed before they commit to new projects.

"Political stability and policy credibility are paramount to corporates making long-term investment decisions," Nomura said in a note on Tuesday.

Investment slowed to a decade-low of 1.7 per cent last fiscal year.

Goldman Sachs expects investment growth to ease further to 1.2 per cent this fiscal year, dragging down overall economic growth to 4.3 per cent. The government is more optimistic, forecasting growth in the year of between 5 and 5.5 per cent.

The downturn has hit government finances, making it tougher for Finance Minister P Chidambaram to deliver on his promise to narrow the budget deficit to a six-year low of 4.8 per cent of gross domestic product this year.

With revenues under pressure and his reputation on the line, Chidambaram is expected to wield his budget knife to hit the deficit target. Such a move in the backdrop of weak corporate investments could further dent long-term economic prospects.

Concerns about the high budget and current account deficits combined to help drive the rupee currency to record lows earlier this year.

The economic malaise has also doubled bad loans at Indian banks since 2009 to 4.2 per cent of total loans, raising concerns over the health of the country's financial system.


Photographs: Reuters

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