Indian economy

Topics: Macroeconomics, Investment, Inflation Pages: 2 (519 words) Published: December 14, 2013
A year of improvement and surprises
India’s growth environment has been on a roller coaster ride since the credit crisis. After growing at a healthy rate of 8.9%YoY (average) during 2004-07, the growth will decelerate sharply to a near-decade low of 4.8%YoY in FY14 according to our estimates. While we believe that growth in India is stabilising, the recovery will be very gradual. We expect India’s GDP growth to pick up only modestly to 5.4%YoY in FY15 and further to 6.1%YoY in FY16. For this recovery to sustain without reigniting the macro stability risks, the investment cycle needs to pick up ahead of consumption. We believe the parliamentary elections due in May 2014 will be the next catalyst. Momentum to pick up pace post elections

We have assumed a stable coalition government in the next parliamentary election as our base case scenario. While the economy is showing some incipient signs of revival, the recovery does not seem to be broad based. We expect external demand to be the key growth driver in FY15 while consumption and investments are likely to stabilise at low levels. We also expect some pick up in capex trend largely on government initiatives to clear logjams to speed up project implementation. However, the high cost of capital to manage inflationary pressures, a cut in government spending to meet deficit targets, political uncertainty constraining the capex cycle recovery and a lack of structural reforms will continue to weigh on overall growth expectations over the next 6-9 months, in our view. We expect investments mainly the private corporate capex to show a credible improvement only in FY16 once political uncertainty is resolved. Macro stability risks seem to be improving on the margin

The delay in QE tapering by the Fed and quick measures taken by the Indian policymakers – including: (a) clamp down on gold imports; (b) measures to attract dollar deposits via the FX swap window; (c) speeding up project implementation in the investment space;...
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