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December 28, 2012

India’s Economy Looks to Rebound in 2013

by Anjana Pasricha

India’s economy has experienced its worst slowdown in nearly a decade this year. But there are signs that the country, which is still among the world’s fastest growing economies, may soon begin to recover from the slump.

Month after month in 2012, virtually every sector of the Indian economy - agriculture, mining, manufacturing and services - slowed. At the end of the year, economic growth stood at 5.3 percent.  

It was a huge disappointment for a country whose economy had been racing ahead at eight percent plus for the last eight years.
        
Like many other countries, India was affected by the global slowdown as exports were hit. But several domestic factors also pulled down the economy.
 
Many economists blamed the government, which faces allegations of graft in many spheres, for policy inaction.

Chief economist at ratings agency, CRISIL in Mumbai, D.K. Joshi, says the downturn was sharper than warranted by global factors.  
   
“It is widely recognized now, to clear projects it is taking time because of governance issues. And when it takes time to clear projects, the investment pipeline gets choked," says Joshi. "As a result of that investment slowed down quite significantly. Then we also had high inflation regime, and high inflation means the Central bank cannot cut interest rates to perk up the economy.”
 
The government admits that investment is critical to revive the economy. Faced with plummeting growth, it has taken some steps to liberalize the economy and make it easier for foreign businesses to pump money into sectors such as retail, aviation and insurance. The long-awaited reforms were the biggest initiated in nearly ten years. Authorities also promised to speed up clearances for large infrastructure projects.

The government also announced spending cuts as it grappled with high deficits. It slashed subsidies on fuel despite political opposition. This is expected to ward off the threat of a credit rating downgrade.

Economist N. Bhanumurthy with the National Institute of Public Finance and Policy in New Delhi, says these steps are meant to reassure investors and could help the economy stage a gradual recovery.    

“Frankly right now the most important issue is confidence among investors, both domestic and foreign. All these measures are expected to provide some kind of confidence-booting measures for revival in the economy." he said. "Our own projections for the next year, 2013-14, is 7.1 percent.”

 
Prime Minister Manmohan Singh has said the government’s first priority is to reverse the slowdown. But he says that a return to eight percent growth is an ambitious goal.
 
Despite the slowdown, India remains high on the radar of foreign investors.