major macro economic indicators
|GDP growth (%)||6.6||4.7||4.4||5.5|
|Inflation (yearly average) (%)||9.5||10.2||9.5||8.0|
|Budget balance (% GDP)||-8.5||-7.8||-7.7||-8.0|
|Current account balance (% GDP)||-4.2||-4.7||-2.0||-2.4|
|Public debt (% GDP)||67.0||67.6||66.7||65.3|
- Diversified growth drivers
- Solid fundamentals: high levels of savings and investment
- Effective private sector in services
- Moderate external debt and satisfactory foreign exchange reserves
- Lack of infrastructures and shortcomings in the educational system
- Wage rises for skilled workers could erode comparative advantage
- Net importer of energy resources
- Rising dept private businesses
- Weak public finances
- Persistent uncertainties over the Kashmir issue
Moderate recovery in growth
The 2013-2014 fiscal year was marked by a further slowdown in growth due to weakening domestic demand and a fall in exports. In 2014-2015, the buoyant services sector will continue to contribute to growth, particularly in the area of high-tech. Exports will also benefit from a slight global recovery and the weak rupee. Although the rupee has risen by 14% since its lowest point in August 2013, it has depreciated by more than 8% against the dollar since May 2013. Lastly, consumption, the main growth driver, is expected to continue to grow at a moderate pace due to an increase in disposable household income. Moreover, the BJP has announced social measures in line with those initiated by the Congress Party and, in particular, a health system and housing subsidies. In 2014-2015, the possible introduction of major structural reforms due to Narendra Modi (BJP) taking up office points towards better prospects. Indeed, his campaign programme was based on economic development and improvement in governance. In order to encourage investments, a simplified approval mechanism is to be introduced particularly in energy and the environment. Furthermore, he has promised to create 10 million jobs per year and plans major infrastructure programmes (high-speed train network, construction of 100 new towns and new industrial areas).
In addition, inflation slowed in 2013 due to lower prices for manufactured products and oil and a tightening in monetary policy from September 2013. However, it will remain at a high level in 2014, particularly due to the poor harvests.
Persistence of twin deficits
The fiscal deficit at local and federal level remains high despite the willingness to consolidate public accounts. The amount of subsidies, for example, is set to remain high. However, the tax programme of the new government provides for greater fiscal discipline, harmonising of VAT at the federal level and a drop in subsidies particularly on commodities.
Regarding external accounts, the policies implemented to halt the fall in the rupee in the summer of 2013 (hike in key rates, taxes on metal imports, etc.) have paid off and the current account deficit has stabilised to roughly 2.5%. Although the size of oil, gold and coal imports prevents the full absorption of the current account deficit, the balance of services and transfers limit its size.
Furthermore, the public banks, which represent three quarters of banking assets and concern the financing of non-profitable sectors, have shown a deterioration in the quality of their assets. Lastly, the depreciation in the rupee has affected companies indebted in foreign currency and may also affect the quality of banking assets.
Victory for BJP in the April – May 2014 parliamentary elections
The 2014 parliamentary elections resulted in a victory for the BJP (Bharatiya Janata Party). The party obtained an absolute majority, winning 282 of the 543 seats in the Lok Sabha (lower house). For the first time in 25 years, Narendra Modi – the former Chief Minister of Gurajat – will be able to form a government without a coalition. Such conditions will be favourable for the introduction of the reforms announced in his programme. Nevertheless, the success that he has obtained in Gujarat will be difficult to apply on a national scale. The federal system complicates the adoption of reforms and his style of leadership risks clashing with national operations. Some reforms also require a change in the Constitution. Furthermore, Mr Modi's track record in Gurajat is tainted by the violence in 2002 during which thousands of Muslims were killed. He must overcome the suspicions about his role in these events and take measures to prevent inter-ethnic violence.
Despite the expected reforms, the business climate will continue to suffer from persistent weaknesses, such as high corruption and deficient energy supplies. Companies suffer from structural and regulatory constraints.
Lastly, the presence of the Prime Minister of Pakistan at the investiture of Prime Minister Modi marks the start of an improvement in relations between the two countries.