Moody’s predicts overall growth rate of 7.3% for 2015, the lowest

The Dollar Business Bureau “India’s first quarter growth rate is tracking around 7.3% YoY, a slowdown from prior quarters, but we expect this softness will prove temporary, with improving domestic demand to help India’s gross domestic product (GDP) grow 7.3% for all of 2015,” says a Moody’s Analytics study. India’s economy is on a cyclical upswing. Forward-looking indicators suggest domestic demand is gathering momentum. Low inflation has enabled the Reserve Bank of India to cut interest rates by 50 basis points in early 2015, easing pressure on the private sector. Lower rates as well as the government’s infrastructure and disinvestment programs should provide a boost to domestic-oriented industries, the study said and added, the government has begun selling public assets as it plans to raise Rs 700 billion in fiscal 2015-2016 (April to March). Approximately 5% of the Rural Electrification Corp., a state-owned power company, was sold in early April. Strong investor demand for the electricity company suggests that the government should have few problems selling its other assets. India’s state-owned companies are notoriously inefficient, with significant bureaucracy and endemic corruption. Asset sales can make companies more productive and should ease the supply bottlenecks choking the economy. That said, the government has failed to meet its disinvestment targets over the past five years, so it will need everything to go right this time around, the Study said. The report also stated, “Funds raised from disinvestments will be spent on developing India’s ailing infrastructure. If revenues fall short, we expect the government to cut expenditure to meet its 3.9% deficit target for 2015-2016. Lower government spending is a downside risk to our forecast over the coming year. The government also wants more foreign businesses to invest in India, with a focus on public and private partnerships”. Foreign investment in India has been weak because of significant red tape and taxes. The government is taking encouraging steps to reduce these burdensome regulations to entice more foreign investment. “Speaking in Germany recently, Prime Minister Narendra Modi turned salesman to hone the message of "Made in India” to German industries. He is pushing the idea of foreign businesses using India as a manufacturing hub. That said, the government has a long way to go to make it just as easy to do business in India as in Germany, or even some of its regional neighbours.” “India’s low rank in the World Bank’s ‘ease of doing business index’ highlights the concerns of foreign businesses and explains why India’s manufacturing is smaller than that of its regional counterparts”, the Study said. Indian manufacturing accounted for only 19% of GDP in 2014, whereas in the rest of Asia this share is more than 30%. Moody’s says that it remains sceptical that the government can solve a wide range of structural issues this year, although they are on the right path. Total investment is expected to contribute 1.2 percentage points to GDP this year, but if the government can reduce red tape, investment will expand more strongly in the coming years.    

This article was published on April 17, 2015 – 6.09 pm IST.