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India likely to grow below 5% this fiscal

August 27, 2013 18:22 IST

GrowthIndia's struggling economy is likely to grow even more slowly this fiscal year than the decade low of 5 per cent struck last year, as investment will stay weak due to inadequate reforms and uncertainty ahead of a looming election, a Reuters poll showed.

The parlous state of Asia's third largest economy was reflected in the rupee's 18 per cent plunge against the dollar to all time lows since May, when signals emerged that the US Federal Reserve was considering winding down an easy money strategy that had benefitted emerging markets like India.

Burdened with a record high current account deficit, the rupee has suffered a far steeper fall than other emerging market currencies, and investors doubt whether Prime Minister Manmohan Singh's minority government will take bold enough steps needed to remedy the economy with an election due within nine months.

The median consensus estimate by 36 economists surveyed over the past week put annual growth at 4.7 per cent in the April-June quarter, slowing from 4.8 per cent in the March quarter.

The data is due to be released on Friday at 1730 IST.

"The growth momentum was weak even before the latest bout of instability in the domestic markets and these risks have become starker after the measures adopted to arrest the currency depreciation," said Radhika Rao, economist at DBS Bank in Singapore.

"A sharp lift up in productive capacity building is unlikely ahead of the elections, given the need for policy clarity. Policies might be put forth, but could lack regulatory teeth," Rao said.

The Reserve Bank of India's defence of the rupee has put another brake on an economy, as the cost of borrowing for companies increased as the central bank tightened money market liquidity.

Raghuram Rajan, a widely acclaimed economist, who takes over as governor of the RBI next month is expected to prioritise currency stability over inflation and growth, according to a separate Reuters poll this week which also showed the worst is not over for the rupee.

On Tuesday the rupee plumbed lows after the lower house of Parliament approved a nearly $20 billion plan to provide cheap grain to the poor that raised concern over the government's efforts to reduce the fiscal deficit to a target of 4.8 per cent of gross domestic product in the current fiscal year.

The government aims to reduce the current account deficit to 3.7 per cent of GDP this fiscal year from the record 4.8 per cent notched last year, but 16 out of 29 economists regarded that target as optimistic.

India's growth slowed to 5 per cent in the 2012/13 fiscal year that ended in March, its worst performance since it grew by 3.9 per cent in 2002/03.

Twenty-nine economists responded to questions on how the economy would fare compared to last year's dismal showing.

Fourteen said the economy was likely to grow at a pace slower pace, and five took a stronger stand saying it was highly likely it would be below last's years 5 per cent. Ten said it was unlikely that growth would be worse than last year, but some added that any improvement would be marginal at best.

"Recovery in the Indian economy would be a protracted one," said Vishnu Varathan, economist at Mizuho Corporate Bank in Singapore. "The bottoming could be more prolonged and less distinct."

For all its problems, almost all the economists agreed that the Indian economy was not close to a full blown balance of payments crisis, as suffered in 1990-91.

Additional reporting by Shaloo Shrivastava

Yati Himatsingka in Bengaluru
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