INDIA Economic
growth picked up but remained below potential
The economy expanded by 4.9%
in the fiscal year 2013, up from 4.5% in the previous year. This rate is,
however far below the 9.5% pace registered in the years prior to the global
financial crisis. Subdued output growth pushed up the measured unemployment
rate by one percentage to 4.7%.
A fragile global economy has
weighed on growth in recent years, but delays in tackling structural
impediments, such as rising inequality, high inflation, infrastructure
shortages and public spending effectiveness, have also been important factors.
Tight monetary policy to
contain inflationary expectations and capital flight also had and impact on
domestic demand. Consumer confidence deteriorated with car sales in 2013
declining for the first time in a decade. Fixed investment also showed, in the
with sluggish demand and higher interest rates.
The economy is expected to
enjoy stronger growth momentum of 5.5% in the fiscal year 2014, underpinned by
solid expansion in the Industrial and services sectors. Higher growth in the developed
countries and the weaker local currency would support exports. The formation of
a new Government after parliamentary elections in April-May 2014 also provides
impetus to economic reforms.
Elevated
inflationary pressure
The inflation rate remained
at above 10% in 2013. In addition to
supply constraints, the weaker currency and cuts in fuel price subsidies are
contributing factors.
High food inflation hit the
poor harder, as they spend proportionally more on food purchases, especially
cereals and vegetables. Food items account for close to half of the consumer
price index in India.
Exports
rebounded
Merchandise exports resumed
a positive growth in 2013 after a modest contraction in 2012. The pickup was
mainly fuelled by strengthening import demand from developed economies but the weaker
Indian Rupee also helped.
The current account deficit
narrowed to 2.4% of GDP in 2013. In addition to the export rebound, the
measures to curb sizeable gold imports also prayed a role.
Financial
market volatility
India experienced capital outflows
and sharp currency deprecation in mid 2013 on speculation of a change in the
United States monetary policy stance.
In response, capital flow
management tools were introduced, such as lowering the limit on overseas
investment. Moreover, after a steady decrease between January and September
2013, the policy interest rate was raised to stem capital outflows.
Macroeconomic imbalances,
such as persistently high inflation and limited fiscal space, have constrained
India’s capacity to weather capital flow volatility more resiliently.
More heavily affected
economies were those with large fiscal and current account deficits financed by
external short term capital flows. This highlights the need for a deeper
structural transformation to drive India’s dynamic competitive advantage.
Structural
reform agenda
India’s 12th National
Development Plan (2012-17) emphasized the need for the country to reverse the
recent economic slowdown, while ensuring that growth was more inclusive and sustainable.
Tackling macroeconomic imbalances, particularly high fiscal and current account
deficits, is cited as an immediate policy challenge.
Some of the country’s recent
from initiatives include : relaxing caps on foreign investment in such sectors
as retail and telecommunications; setting up an investment committee to speed
up the implementation of large infrastructure projects; passing a food security
act that provides subsidized food grains to two thirds of the population; and introducing
clearer guidelines on the land acquisition process.
Regarding financial reforms,
there are proposals to create a new category of banks that would focus on
lending to small businesses and low income households and to introduce a
structured monetary policy framework to increase central bank independence.
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