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‘India’s self-inflicted economic woes not to change till 2014’

business Updated: Jul 05, 2012 22:48 IST

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India’s economic troubles are mostly self-inflicted, resulting from policy paralysis and opposition to reforms, says a report.

“That (situation) is unlikely to change until the 2014 general elections at the earliest,” said the report — Emerging Asia Economics Update - What’s Gone Wrong in India? — by Capital Economics, a global macro-economic research consultancy.

The report expressed doubts over reforms even post-2014. It noted that India’s economic performance deteriorated sharply as GDP growth slowed to 9-year low of 5.3% in the first quarter of this year.

“We believe that growth dropped to well below 5% in Q1 on an annualised basis,” it said.

A major contributor to the slowdown was the big drop in investment, which slumped to (-)1.9%, year-on-year during the latest three quarters from double-digit levels in late 2010.

Expectations of growth have also been scaled back.

The latest consensus forecasts were for 6.3% growth this year, down from 7.8% at the beginning of the year, said the consultancy.

“As growth has slowed, India’s twin deficits have increased. The central government budget deficit increased to 5.9% of GDP last fiscal year and the current account deficit widened to 3.7% of GDP,” it noted.

Foreign reserves remain quite high, at $292 billion, but have fallen by $30 billion since August 2011. Although wholesale price inflation has declined, it too was high, at 7.5% year-on-year. The report said India’s problems can’t be blamed on the weak external environment.

While export growth has declined to 4% year-on- year in the first four months of this year, from 38% in 2011, India’s economy remained far less open than most emerging Asian economies, which have not slowed as much as India.

“Given that these explanations are unconvincing, it appears that weak governance, although not new, is the most plausible explanation for the slowdown,” the report said.

No significant reform has been passed during Prime Minister Manmohan Singh government’s second term, observed Capital Economics.

“Repeated promises to liberalise FDI in the retail, insurance and airline sectors have come to nothing. Nor has the government honoured pledges to pass legislation facilitating land acquisition and investment in mining,” it said.

With elections due by May 2014, this policy paralysis is likely to get worse during the coming two years and there is also a growing risk of populist decisions such as further increases in spending on welfare programmes, the report said.

“The main opposition, the Bharatiya Janata Party, is no more reform-oriented than Congress, and the rise in support for regional parties means that the BJP would, like Congress, need coalition allies to form a government,” said Capital Economics.