Hopes of a sustained economic rebound in India could be short-lived, as underlying issues including high inflation, poor infrastructure and a dire need for job creation persist.
The Indian economy grew by 5.7 per cent in the quarter to the end of June compared with the same time last year, its fastest pace in more than two years, according to official data released on Friday.
But the World Economic Forum’s (WEF) global competitiveness list, released yesterday, showed India slipped 11 places to rank 71st. Another report this week highlighted deteriorating business confidence in India.
“The country’s new government faces the challenge of improving competitiveness and reviving the economy, which is growing at half the rate of 2010,” the WEF said.
The Bharatiya Janata Party (BJP), led by the prime minister Narendra Modi, came to power in May following a campaign based on promises to boost the country’s economy and improve the business environment. Indian stock markets have surged in recent months on optimism surrounding the new government.
“The domestic macroeconomic factors have been something of a mixed bag,” said Killol Pandya, a senior fund manager for debt at LIC Nomura Mutual Fund. “The resurgence in GDP numbers has revived hopes of an early economic revival, though it is wise to be cautious about the matter. Agriculture continues to drag, while industrial output and service sectors have shown impressive growth numbers. It ought to be noted that some part of the GDP spurt is because of the front-loading of government spend.”
He pointed out that the government might have to cut spending in the second half of the financial year as it strives to reduce the fiscal deficit.
“This may lead to a stalling of the growth trajectory in the near term and is something to be watched out for,” Mr Pandya said. “In addition, some worries may also be ascribed to the global geopolitical flashpoints emanating out of the Middle East and the Russia-Ukraine issue, which are causing anxiousness among domestic players.”
The consensus is that India needs to achieve economic growth levels of about 8 per cent to create enough jobs in a country with a population of more than 1.2 billion – more than half of which is under the age of 25.
A delay to the vital monsoon rains in India this year has fuelled food inflation.
HSBC’s services PMI for India this week showed business activity slowed to a reading of 50.5 last month compared with 52.2 in July.
“This follows a temporary post-election boost in activity,” said Frederic Neumann, the co-head of Asian economics research at HSBC. “Business confidence – a key ingredient in the recent growth revival – deteriorated further, which calls for a pickup in the reform momentum. Faster reforms are also needed to sustain growth momentum and counter the coming drag on the economy from weak monsoons, fiscal consolidation and tight monetary policy.
“The government’s inaction on subsidies in the budget, the decision to block a global trade deal and more recently the supreme court’s decision to cancel coal allocations since 1992 have likely soured sentiment further.”
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