India's Economy May Grow by 6% in 2012: Moody's Close.

India's economy may grow by 6% in 2012, according to report by Moody's Analystics, the research arm of ratings firm Moody's.

'India's economy faces trouble heading into 2012, and Indian policymakers bear much of the responsibility.' said the note.' GDP growth fell below 7% y-o-y in the third quarter of 2011 and will slow further through 2012.' it added.

Activity slowed sharply through the second half of 2011 as a deteriorating global outlook and domestic policy missteps crimped business confidence and dragged on growth.

Export growth dipped from more than 50% y-o-y through the middle of 2011 to just 3.9% in November. Imports fared slightly better, halving from 50% y-o-y growth midyear to 25% in November. Industrial production was nudging 10% y-o- y through mid-2011 but by October, the most recent month for which data are available, output was falling at a 5.1% yearly rate. The broad-based production slowdown saw output of consumer goods down 0.8% y-o-y in October, pointing to an easing in consumer demand.

India's corporate sector looks particularly vulnerable. Production of capital goods, a gauge of business investment intentions, plunged 25.5% y-o-y in October. Fixed investment, which surged 12% in 2010, fell 0.6% y-o-y in the third quarter of 2011. There is still a fair amount of public investment, especially in roads and other infrastructure. Electricity production remains inadequate-300 million Indians still don't have access to power-constraining the industrial sector. But private investors have pulled back in recent months amid elevated borrowing costs and weaker demand, coupled with a lack of confidence and government paralysis.

Financial markets tell a similar story. The Sensex fell 25% in 2011, while the rupee fell a dramatic 16% in 2011, making it the worst performing major Asian currency. Portfolio investors have been actively withdrawing funds. Net outflows hit $380 million in 2011 after rising a record $29 billion in 2010.

Meanwhile, India still has an inflation problem. The consumer price index has recently been rising 9.4% y/y, while the more closely watched wholesale price index has been rising at a near 9% annual pace for almost two years. Prices are going up across most subcategories, suggesting that pipeline pressures and inflation expectations remain elevated.

India's stagflation puts policymakers in a tough position-yet it is a position largely of their own creation, according to the report. The Reserve Bank of India lifted interest rates 13 times in an effort to stamp out inflation, but the effort has failed. The RBI was initially caught off guard as inflation rose in the post-crisis recovery, and then were too meek when they decided to hit the brakes. This has produced the worst of both worlds: Growth has been hit but with no noticeable effect on inflation or expectations.

But the long-term picture is perhaps the bigger question. India still has a large, young, entrepreneurial workforce and has begun to see the benefits of growth and reform, but activity will weaken as long as the 20-year reform process remains stalled. We have adjusted the GDP forecast for 2015 through 2020, expecting annual growth of 7.5%, down from 8%. India still has a great story, but growth rates of 9% or better don't just happen. The correct policies need to be in place, and they aren't as yet.

Source : economictimes.indiatimes.com