Persistent Risks

India's economic growth forecasts have been cut following the publication of 2012/13 figures. The economy grew by 5% in the last fiscal year. This means that, for the second straight year, the economy saw its slowest growth rate for 10 years. It is therefore reasonable to ask whether the government will be able to improve the public finances and complete its investment programme, which is crucial to resolve bottlenecks and avoid any reduction in India's growth potential. There are also major external imbalances and pressure on the rupee remains high.

A weak recovery
Growth forecasts for 2013 have been revised lower in all emerging Asian countries, and in India in particular. The recovery remains weak, and economic indicators are very mixed.

In the 2012/13 fiscal year (ended at the end of March), India's economy grew by only 5%, 1.2 points less than in 2011/12, making it the slowest growth rate for 10 years.

On the supply side, the agriculture and manufacturing sectors saw a sharp slowdown, with growth of 1.9% and 1.2% respectively in 2012/13. Growth in manufacturing was only 1%, the weakest in 15 years. Activity in the services sector remained robust, rising by 6.8%, although this represents a 1-point fall relative to 2011/12. Services accounted for 90% of India's growth. On the demand side, growth slowed sharply in consumer spending (from 8% to 4%) and business investment (from 4.4% to 1.7%).

The growth outlook for 2013/14 is not encouraging. The growth overhang in 2013/14 is low at 1.5%, versus 2% in 2012/13. Growth should see a limited rebound to 5.3% due to a slight acceleration in consumer spending and business investment. However, this scenario faces major risks, particularly regarding the investment outlook.

Industrial production data confirm that a recovery is taking place, but that it remains very limited (+2.4% year-on-year in April). Capital goods production has been accelerating since February, supporting the theory that investment is recovering. However, new manufacturing orders, as indicated by India's PMI, fell further in April. Together with low capacity utilisation in the manufacturing sector and latest survey results regarding companies' investment plans, this suggests that growth in investment will be weak. The lack of investment is dragging down India's medium-term growth prospects: the FMI cut its medium-term forecast from 7.5-8.0% in February 2012 to 6.2-6.8% in February 2013.

The slight rebound in India's growth in 2013/14 will be driven more by a limited acceleration in manufacturing than by the service sector, given the latest PMI figures.

BY Johanna MELKA

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