A falling rupee, slowing industrial activity and weak global economic environment are taking a toll on India's growth. The Reserve Bank of India (RBI) on Tuesday lowered its growth projection for Indian economy to 5.5% in 2013-14 against its earlier forecast of 5.7%. The central bank, thus, joins a long list of global agencies that have done the same.
“While the onset of the monsoon and its spread have been robust, the persisting weakness in industrial activity has heightened the risks to growth,” RBI governor D Subbarao said. “Moreover, global growth has been tepid, with consequent adverse spillovers on India's exports, manufacturing and services,” he added.
The Indian economy is caught in a vicious circle. A stubbornly high consumer inflation rate and a ballooning current account deficit (the difference between dollar inflows and dollar outflows) have forced the RBI to keep interest rates high.
This has made it expensive for consumers to buy property, cars and consumer goods on EMIs. Result: companies are facing a sales slowdown. This, in turn has meant that companies are producing less and putting off expansion plans.
The overall impact: very sluggish economic growth. India grew at 5% in 2012-13, its slowest in a decade.
“We remain negative on India's economic outlook over the next nine months due to deteriorating external finances, feedback effects from a weak rupee and the election cycle,” said Sonal Verma, economist, Nomura India.
“The current financial year will not be qualitatively better than last year,” added Rupa Rege Nitsure, chief economist, Bank of Baroda.
Indian industry wants RBI to take a risk and cut interest rates sharply to stimulate growth. But such a move can fuel inflation, undo the benefits of any resultant growth and push the economy back into the low growth spiral.
The RBI and the government will, thus, need to take strong action but this will have to be calibrated very carefully for India to return to a high growth trajectory.