Doha: The Indian economy is on the mend, said Qatar National Bank Group (QNB) in its weekly analysis. The IMF expects the Indian real GDP growth to recover to 5.4 percent this year (4.4 percent in 2013, the lowest in 5 years), bolstered by a rebound in agriculture and stronger exports and government reforms. However, lingering imbalances and structural impediments are still holding back a full recovery.
The ongoing parliamentary elections mark a cross-roads to the current programme of reforms needed to sustain stronger growth. Of critical importance will be how the new leadership will tackle the lack of infrastructure investment and structural reforms whilst attempting at the same time to keep the current account and fiscal deficits in check.
Following robust annual average growth of over 9 percent during 2004-07 spurred by a rapid expansion of services and commerce, the Indian economy suffered a slowdown with the onset of the global financial crisis of 2008-09, with real GDP growth falling to an average 6.2 percent.
Growth did rebound initially between 2010-11 in response to large fiscal and monetary stimulus but subsequently slowed down markedly, reflecting weak global demand and slow progress on key structural reforms. Led by weaker corporate investment growth with deteriorating asset quality impacting the financial positions of banks and corporates, the slowdown had ripple effects throughout the economy between 2012-13.
The balance of payment pressures intensified severely last summer. The announcement that the US Federal Reserve would begin tapering its quantitative easing program in May 2013 resulted in large capital outflows with downward pressures on the currency and asset prices.
India was one of the main emerging market countries affected due to its heavy reliance on capital inflows to finance its large current account deficit. The Indian Rupee slumped to a record low of 68.4 against the US Dollar in late August 2013 from an average rate of 55.0 in the first half of 2013.
In response, liquidity conditions were tightened, limits on foreign direct investment and external borrowing were loosened and restrictions on gold imports were imposed. The strong domestic policy response has also helped calm markets and bolster investor sentiment.
Overall, stronger global growth, improving export competitiveness, measures already underway to advance stalled infrastructure projects and a confidence boost from recent policy actions are likely to result in a moderate growth recovery over the medium term. However, further structural reforms in the areas of electricity and transportation, fiscal consolidation, education and health spending, and the pricing of natural resources are needed in order for India to achieve its full growth potential.
The Peninsula
