Outlook: Indian Economy 2013

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- Manika Premsingh

2012 was not a year to remember for the Indian economy, with a slowdown in growth, persistently high inflation, concern on government deficits, dipping foreign investments, depreciating currency and shrinking foreign trade. While government reforms announced in September have contributed to some turn around, in 2013 India’s challenges are far from over. At best, it will be a mixed bag with the economy performing slightly better on some parameters like growth, inflation and investments but the external sector and government finances are likely to remain under pressure.  

Latest forecasts for the Indian economy suggest a mild turnaround in 2013, with the International Monetary Fund (IMF) expecting the economy to grow at a sluggish 6% during the year in its September World Economic Outlook report. This is small rise from the around 5.5% levels seen in the recent quarters, the lowest growth in years. Given the ongoing cyclical recession for the domestic economy and continued uncertain global economy, this forecast is quite likely to be correct.

Continued subdued growth is also likely to play some role in moderating inflation, which has recently come off to around 7.5% levels on a year on year basis. Though there will be a floor to the moderation given that the government is looking to rationalise prices of currently subsidised commodities like oil in a bid to improve its deficit situation. With 2013 being the pre-election year, however, government expenditure could remain strong. Combined with subdued economic growth, the fiscal deficit to GDP target will likely be breached in 2012-13, and guidance for 2013-14 in the Union Budget will suggest whether or not there is room for optimism on the deficit front in 2013-14. 

Nevertheless, the displayed intent to keep deficit under check (as evident from the ongoing rationalisation in otherwise subsidised goods) is likely to impact foreign investment inflows into the country positively. S&P, the global credit rating agency has already warned that India could lose its investment grade rating if it does not get its growth and fiscal act together. With the government announcing foreign direct investment (FDI) relaxations in a number of sectors in September, including the politically sensitive multi-brand retail, there has been some positive development in foreign inflows. Thus, we could see continuation in healthy foreign inflows in 2013, which were quite subdued for most part of 2012-13 up to September.

It does need to be noted however, that the impact of the continued indifferent global economic scenario will also play on foreign inflows, as on India’s exports. So far in 2012-13 (April-November) goods’ exports have declined by almost 6%, particularly as India’s traditional trade partners - the advanced economies of the West - are struggling. While imports have also shrunk on slow economic growth in India, the relatively slower decline, traditional deficit and some pickup in the economy next year could lead to a continued widening in the trade deficit next year, even though the deficit widening has been relatively muted this year.

As the trade deficit starts to widen again, it could be a balancing factor for a potential rupee appreciation pressure that is likely as foreign investments in recently liberalised sectors start trickling in. After depreciating to a USD/INR rate of around Rs 55 in August, India’s currency recovered somewhat in the past months. It remains to be seen whether RBI will intervene in the currency markets, after being relatively hands off in the past year; though it is very likely to start cutting interest rates in 2013 as growth concerns take over inflation concerns. This could be a positive for the credit cycle and eventually growth trajectory of the Indian economy.

This post first appeared as an article in Business Bhaskar.