5 Reasons India’s GDP Growth Is Heading To A 10-Year Low
India’s slowdown has been faster than expected, with first quarter GDP growing just 5.3 percent. Analysts have lowered their FY2012 growth projections and ratings agencies have threatened to downgrade the country to junk territory.
Citi analyst Rohini Malkani thinks India’s GDP growth is likely to “skid to a ten year low” for 5 key reasons:
- “Drought fears are coming true”: Malkani has lowered her FY13 growth forecast to 5.4 percent and FY14 forecast to 6.2 percent. And if drought conditions worsen growth could drop to 4.9 percent this year.
- Politics and policies are deterring investments: Malkani thinks in the last 1.5 years markets have become “increasingly disillusioned with the pace of reform, with a number of investment projects stalled and corruption allegations tainting the incumbent government.” And the emergence of regional parties and Congress’ dismal performance in state polls means they’re starting to play it safe with their politics and economic policies.
- Power outages are impacting growth:The recent power outage that left 50 percent of the country in darkness, and “anecdotal evidence of worsening power shortages” are all impacting growth. What’s more notified power cuts are at record highs and do not cover a massive chunk of the country that isn’t connected to the power grid.
- Consumer confidence is low and could
impact consumption: Unlike the slowdown in investment which is well
recorded, declining consumer confidence shows that consumption which has been
stable could slow too.
- The weakness in the rupee isn’t helping exports, and exports are impacted by global demand: The share of exports in GDP has increased and while the weakness in the rupee would be expected to boost exports, the composition of India’s exports is dominated by high-value goods, so the weaker rupee is unlikely to have a major impact. Rather exports will be affected by global demand. Export growth is expected to be soft in coming months.
But it isn’t all bad, India still has a domestic demand driven economy, its demographics are strong and it still has a high savings rate. The unwillingness of the political class to implement much-needed reforms has however left investors expecting 5 – 6 percent growth in the next two years.
- Umesh Shanmugam