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India's Slowing Economy Unlikely to Stage Quick Recovery

  • Anjana Pasricha

A customer leaves a shoe store in Mumbai January 31, 2012.

A customer leaves a shoe store in Mumbai January 31, 2012.

Economists in India say the nation's economy is growing at its slowest pace in three years. From New Delhi, Economic growth is not expected to pick up significant pace anytime soon.

Government estimates have confirmed what economists have been saying for several months. India’s economy will grow by 6.9 percent in the financial year that ends in March. That figure is sharply down from the 9 percent growth the government had forecast at the start of 2011. It is also the slowest pace since the economy was hit by the 2008 global financial crisis.

At that time, India’s economy had staged a swift recovery. But most economists say this time, that will not happen.

A. Prasanna, an economist at ICICI Securities in Mumbai, says global economic turbulence and domestic problems have contributed significantly to the slackening pace this time.

“Investment demand has really slowed down in India because business sentiment has turned weak," explained Prasanna. "On top of that we had the Reserve Bank hiking interest rates quite aggressively though the whole of last year to contain inflation, so the higher rates have had further dampening impact on investment.”

The government is being blamed for the reduction in investment demand. It put pro-business policies on hold to deal with a series of corruption scandals and a lack of political consensus.

Moreover, its own finances are also not as healthy as they were in 2008. Then, the government injected billions of dollars to boost consumer demand. It cannot do this again because it is grappling with a high fiscal deficit.

Economist Prasanna says all eyes are on the federal budget to be announced next month because the government’s response could be critical in determining the pace of recovery.

“If the government does send out a signal that they will work hard to bring down the deficit, that and take up an opportunity to proceed with some reforms in key sectors, it will help in bringing down interest rates," Prasanna said. "It will also help in improving business sentiment. That may not help much in the current year, but it's important down the line.”

However, there is some cause for cheer. After losing 25 percent of their value last year, stock markets are recovering as more foreign funds begin to flow in. The local currency, the rupee, has also recovered some value after falling to an all time low against the dollar last year.

But economists caution that the government cannot take high growth for granted as it has done for years. They say it will have to work harder to give fresh momentum to the economy.

Most forecasts put growth at around 7 percent in the coming year. That is high compared to developed countries, but not high enough for an emerging economy that hopes to be one of the engines of a global economic recovery this decade.

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