Indian economy slows down as hopes pinned on reforms.

MUMBAI (Xinhua) -- The economy of India, Asia’s second largest economic powerhouse after China, is expected to post a further slowdown in 2012 after achieving a slim annual growth of 6. 5 percent during last fiscal year.

Based on the available data on the country’s performance so far, there is no doubt that India’s growth in 2012 will be below 6 percent, the lowest in nearly 10 years.

Despite this negative scenario, economic reforms allowing the entry of foreign direct investment (FDI) into the retail business raised hopes of reviving the nation’s economy amid a wobbling world economy.

The reform measure was approved by the Indian Parliament in December.

Although this particular measure encountered strong opposition from local retailers and members of the opposition in Parliament, economic analysts said that this law would greatly improve India’s economic structure and competitiveness in the world market.

Given this backdrop, international rating agencies and some financial institutions have already predicted that Indian economy could already have reentered the fast lane and regain its lost ground from the fourth quarter of 2012.

As its export was weighed on by the slowdown in the global economy, particularly those in the United States and euro zone, the Indian economy has decelerated during the last two years. In the 2011 fiscal year, the economic growth rate was only 6.5 percent, the first time below 7 percent in three years.

India’s economy has remained weak with the GDP growth rate for the first three quarters standing at 5.3 percent, 5.5 percent and 5.3 percent, respectively. A 5.3 percent reading is the lowest in three years.

Poor economic performance has prompted international financial institutions, including Goldman Sachs and Moody’s, to ratchet down their expectations on India’s economic growth in 2012.

The International Monetary Fund (IMF) was even more pessimistic. In its “World Economic Outlook” report released in October this year, the IMF predicted that the India’s whole year economic growth would fall to 4.9 percent.

As the international economic environment continues to deteriorate, serious financial trade deficit, falling business confidence, and the continuously depreciating rupee has directly pulled down the country’s growth.

India’s October trade deficit widened to the highest record in 2012, with exports down for the sixth consecutive month by 1.63 percent to 23.4 billion U.S. dollars, while its imports up 7.37 percent to 44.2 billion U.S. dollars.

Fiscal deficit also poses a big challenge for the Indian economy. According to the October forecast of Standard & Poor’s, India’s deficit will reach a new high of more than 6 percent of the total GDP, far more alarming than the 5 percent set by the government of India.

Taming high inflation is another a knotty issue for the government. According to the latest official data, wholesale price index increased 7.45 percent year-on-year in November. Moreover, the rise in inflation surpassed 7 percent in nine of the ten months of this year.

The Indian government is well aware that in order to solve old problems which have existed for many years, maintaining the current monetary and fiscal policies alone is far from enough. Given the deteriorating external environment, the central government has decided to carry out comprehensive reforms.

In September, the Cabinet decided to open up not only the retail business but also aviation and power industries to foreign investors, releasing multi-brand retail trade restrictions on foreign investment and setting ownership cap at 51 percent.

The economic reforms were strongly opposed by the Indian People ‘s Party and Trinamool Congress Party, arguing the opening up would severely damage the interests of farmers and small and medium-sized enterprises.

But the FDI bill on retail was finally approved in Parliament, paving the way for the entry of more foreign investments into the country and improving India’s image worldwide.

On Dec. 7, the United Progressive Alliance government of India won a vote on FDI in the retail business at the Rajya Sabha, the Upper House of Parliament, scoring a clear victory against the opposition.

In the upcoming year, there are still some hurdles that India has to face and these are mostly external in character. Uncertainties in India’s main trading partners such as the U.S. and Europe, would bring about weak demands for India’s export and invariably affect the country’s economic growth.

Observers also pinned their hopes on China, one of India’s top trading partners, which could give an upbeat picture for India if it keeps its economy brisk.

India will also have to rein in its fiscal deficit and inflation rate. But to curb inflation, the Reserve Bank of India has already raised interest rates a dozen times in a row, leaving little room to cut rates. Therefore, the Indian government has fewer monetary instruments to stimulate the economy.

Analysts have reached a consensus that taking internal and external factors into consideration, the performance of the Indian economy in 2013 will largely depend on the level of interest rates in the short-, medium- and long-term and on the success of the implementation of economic reforms.

They agree that the Indian economy is expected to bottom out and rebound from the last quarter of 2012. In the medium and long term, it is hopeful that the Indian economy can seize new growth points and continue to improve.

Source : coastweek.com