major macro economic indicators
|GDP growth (%)||6.2||5.0||5.0||5.5|
|Inflation (yearly average) (%)||8.9||7.8||7.2||7.0|
|Budget balance (% GDP)||-8.1||-7.1||-7.4||-7.3|
|Current account balance (% GDP)||-4.2||-3.9||-3.6||-2.7|
|Public debt (% GDP)||65||65.6||64.6||64.6|
(e) Estimate (f) Forecast
- 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 education system
- Wages rises for skilled labour could erode comparative advantage
- Net importer of energy resources
- Rising dept private businesses
- Weak public finances
- Persistent uncertainties over the Kashmir issue
Moderate recovery of growth and opening of the capital market
Growth slowed in 2012/2013 due to weakening domestic demand. A slight recovery is expected in 2013/2014. The possible introduction of structural reforms related to the energy market, the facilitation of procedures for infrastructure projects, as well as to the capital market suggests better prospects lie ahead. Moreover, the dynamism of the services sector is still contributing to growth, particularly in the high tech segment. Exports will also benefit from the fall in the value of the rupee and a slight global recovery. Finally, consumption, the main growth driver, is expected to continue growing at a moderate pace thanks to households’ higher disposable income linked to fiscal support. Inflation has slowed in 2013 due to lower prices for manufactured products and oil but is still high (inflation stood at 5.8% in August 2103). There will be a significant risk of imported inflation in 2014, as the country’s already big energy bill will be hit by the rupee’s weakness.
Persistence of the twin deficits and depreciation of the rupee
The fiscal deficit at local and federal level was cut in 2012/2103. It is expected to stabilise but will remain substantial in 2013/2014, despite intended consolidation of the accounts characterised by an overhaul of the system of subsidies, tax rises and the redirection of spending towards investment. Nevertheless, the amount of the subsidies is expected to remain high despite the reform. Moreover, the political agenda (legislative elections in May 2014) partially explains the noticeable increase in social spending. The Congress Party succeeded in getting its food security bill adopted (1.5% of GDP), under which the purchase of rice and cereals will be subsidised. Recapitalisation of the banks and support for Discom, the public electricity operator, will also fuel public debt.
The current account deficit is expected to continue improving in 2013/2014 due to rising exports, although the scale of oil, gold and coal imports will prevent any significant reduction. Meanwhile, the balance of services and transfers explains the current account improvement. The expected increase in foreign direct investments, linked to the reforms aimed at liberalising the retail market, is expected to result in improved coverage of the deficit by long-term capital. In addition, the cut in the tax on corporate bond holdings denominated in rupees could help to ease the pressures on the currency. The Indian rupee plunged 26% between May and early September 2013, attributable to the American Federal Reserve’s announcements of a change in monetary policy and also to India’s internal weaknesses. The authorities therefore introduced numerous measures to halt this fall (raising key rates, taxes on metal imports…). The public banks, which account for three quarters of bank assets and fund the non-profitable sectors, are seeing a deterioration in the quality of their asset portfolios. Finally, the rupee’s devaluation is putting pressure on businesses with foreign currency loans and could also put pressure on asset quality. However, the entry into force of Basel III regulations in April 2013 should shore up the financial system.
Very difficult business environment
In 2012/13, the Trianamool Congress left the UPA (United Progressive Alliance), a coalition led by the National Indian Congress, in disagreement over the reforms aimed at opening the retail sector to foreign investment. The passing of the bill, despite the hostility of local retailers, meets the objective of attracting investment to sustain growth and halt the depreciation of the rupee. But foreign multilaterals can penetrate the market only by concluding franchise agreements: they cannot own more than 49% of their Indian subsidiaries. The disagreements, defeat in the regional elections and the weakening of the UPA in parliament have led to speculations over early elections before the end of the current legislature in May 2014. The beginning of 2013 was marked by border tensions with Pakistan. The business environment suffers from persistent deficiencies: high levels of corruption and inadequate energy supply. Medium-sized businesses are under structural and regulatory constraints.