Outlook for Indian Economy? Opinions Differ

By Thirani, Neha | International Herald Tribune, January 11, 2013 | Go to article overview

Outlook for Indian Economy? Opinions Differ


Thirani, Neha, International Herald Tribune


HSBC has cut its growth forecast for India and Fitch has restated its "negative" outlook, but other analysts say the economy is on the path to improvement.

Is the Indian economy bottoming out, or getting worse?

It depends on whom you ask.

On Thursday, HSBC cut its growth forecast for India for the current fiscal year, which ends March 31, to 5.2 percent from a previous forecast of 5.7 percent. On Tuesday, Fitch Ratings restated a "negative" outlook on India's sovereign credit rating, warning that a possible downgrade could come in the next 12 to 24 months.

But other analysts, including Moody's Investors Service, Anand Rathi Financial Services and Angel Broking, have said recently that the Indian economy is on the path to improvement.

The uncertainty seems to stem from the sheer number of problems the country is grappling with and the governing Congress party government's inability to deal effectively with inflation, the fiscal deficit, slowing growth and a weak balance of payments.

Just a few years ago, India was considered one of the world's fast-growing new economic powerhouses, and there were expectations the economy could grow 10 percent a year. But in October, the International Monetary Fund cut its prediction for real economic growth in India in 2012 to 4.9 percent, which would be the lowest level in a decade.

On Thursday, HSBC said a structural slowdown in the economy was the reason behind its lowered growth forecast. The bank also cut expectations for the next fiscal year to 6.2 percent from 6.9 percent. "Looking ahead, we expect nonagricultural G.D.P. growth to move more or less sideways in the near term, and only recover very gradually thereafter as key structural reforms are slowly rolled out," the report said.

Fitch said Tuesday that a combination of widening fiscal deficits, slowing growth and persistently high inflation put the country's sovereign credit rating at risk.

"Our key concerns revolve around the fiscal situation in the country and any material decline in India's potential growth rate," Art Woo, director of Asia Sovereign Ratings at Fitch Ratings, said by telephone. "If there is an acceleration in reforms, that would improve India's fiscal condition and would be cause for a positive outlook on ratings," though these moves might prove politically unpalatable and difficult to carry out, he added.

India's current account deficit, a measure of the difference between the value of exports and imports, hit a record high of 5.4 percent of the gross domestic product in the July-September quarter, according to data released by the Reserve Bank of India, the central bank, in December.

Finance Minister Palaniappan Chidambaram announced measures in October to cap the budget deficit for this fiscal year at 5.3 percent of G.D.P., but some analysts are skeptical. "In my opinion India will most likely miss its fiscal deficit target of 5.3 percent of gross domestic production -- which has already overshot a previous target of 5.1 percent," Mr. Woo said.

Under pressure to bolster the economy, the Indian government has introduced a series of economic overhauls since mid-September, including raising the price of fertilizer and diesel, further opening the retailing sector to foreign investment and allowing foreign investment in the insurance, pension and aviation sectors. …

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