Population 1223.17 million
GDP 1946.765 US$ billion
@rating
country
Business climate
assessment
| 2010 | 2011 | 201(e) | 2013(f) | |
|---|---|---|---|---|
|
GDP growth (%)
|
8.4 |
6.5 |
5.5 |
6 |
|
Inflation (yearly average) (%)
|
9.6 |
8.9 |
7.6 |
6.9 |
|
Budget balance (% GDP)
|
-9.4 |
-9 |
-9.5 |
-9.1 |
|
Current account balance (% GDP)
|
-2.7 |
-4.2 |
-3.8 |
-3.6 |
|
Public debt (% GDP)
|
68.1 |
67 |
67.6 |
66.7 |
| (e) Estimate (f) Forecast | ||||
STRENGTHS
- Diversified drivers of growth
- Solid fundamentals: high savings and investment rates
- Effective private sector in services
- Moderate external debt and satisfactory foreign exchange reserves
WEAKNESSES
- Lack of infrastructures and shortcomings in education system
- Higher wages for skilled labour could erode price competitiveness
- Net importer of energy resources
- Rising private company debt levels
- Weak public finances
- Persistent uncertainties over the Kashmir issue
Risk assessment
Modest recovery in growth
In 2012, growth slowed in response to weak external demand and a turnaround in the economic cycle on the domestic front after a long period of monetary policy tightening (13 rate hikes between March 2010 and October 2011) in a context of high inflation. In 2013, growth is likely to remain below potential, due to persistent bottlenecks in the Indian economy (in particular, frequent power cuts, lack of infrastructure and skilled labour), which hampers investment decisions. Investment is accordingly expected to remain modest, while investors wait for the effective implementation of the reforms announced by the government: cuts in subsidies, opening of certain sectors to foreign capital. Consumption, however, the main growth driver, is expected to accelerate thanks to an increase in households’ disposable income and fiscal support for rural populations. Meanwhile net exports to Asia are expected to grow. On the supply side, dynamism in services is expected to boost growth, especially in high-tech industries, as they represent 35% of total exports, a higher level than in the advanced countries, and provide major added value. To a lesser extent, after a marked slowdown in 2012, industrial production (especially chemicals) is expected to climb, due to a slight rebound in external demand and lively domestic demand, itself likely to be underpinned by strong growth in retail sales with the emergence of a middle class. In contrast, the textiles sector is still suffering from lack of competitiveness.
Meanwhile, imported inflation is expected to slow, thanks to expected food and oil price moderation in 2013. Nonetheless, inflation will remain relatively high as it is generated by a shortage of supply on the food market and an inefficient distribution system faced with strong demand linked to the emergence of a middle class. Demand for food products, once reserved for a minority (milk, meat, eggs) has increased substantially resulting in food price inflation which spreads to manufactured products and services through second round effects resulting from wage increases.
Persistent twin deficits
In 2012/13, the current account deficit will remain high due to slower exports, while the country continues to import huge oil amounts (over 30% of imports). In 2013/14, exports are expected to grow in a context of modest recovery in global growth, enabling a slight reduction in the current account deficit. Despite the expected increase in FDIs, linked in particular to the reforms announced by the government regarding opening several sectors to foreign capital, only a third of the current account deficit will be covered by this long-term capital. Given that portfolio investments will only partially cover the deficit, the country is expected to rely again on borrowing. In this context, the rupee could come under downward pressure once again.
In 2013/14, the fiscal deficit is likely to remain substantial, with the amount of subsidies (on petrol, food products, fertilizer) remain high despite cuts in the fuel subsidy begun in September 2012. Moreover, the political agenda (local and parliamentary elections in 2013 and 2014) goes some way to explaining the marked rise in public spending. For example, the Congress party’s Food Security Bill, aimed at supporting poor populations in the countryside (and costing about 1.2% of GDP), is expected to make its way successfully through parliament. This deficit will fuel already high public debt.
Difficult business environment
The coalition led by the Congress Party emerged from the 2012 regional elections weakened and had to contend with popular protests in mid-September against its reform programme. The Party has also been shaken by corruption scandals, which led to a ministerial reshuffle in late October 2012. Further, it lost its parliamentary majority after the Trinamool Congress Party (TMC), whose members were anxious about the impact of the announced economic reforms on public opinion, ended its support for the government. This did not prevent a vote in favour of opening retail trade to foreign investors.
Meanwhile, the business environment suffers from persistent shortcomings, in particular, highly levels of corruption and inadequate energy infrastructures. Finally, the lack of transparency in the financial statements of medium-sized businesses and the absence of group consolidated accounts are still worth noting.
