4 Big Reasons Why The Indian Economy Is Still Stuck

India posted Q3 GDP growth of 4.8%, up from 4.4% the previous quarter. This was largely driven by the industrial and agricultural sector.

India’s industrial sector grew 2.4% on the year. The agricultural sector grew 4.6% on the year, the highest growth rate in two years.

But Societe Generale’s Kunal Kumar Kundu this data seems inconsistent with anecdotal evidence of the impact of heavy rains and floods on crops.

“The impact of cyclone Phailin was visible in most rice-growing areas in coastal Andhra Pradesh and Odisha, two states that account for 20-25% of India’s total rice production,” writes Kundu. “According to experts, cyclones and floods in different parts of the country could result in losses of several million tons of rice this year.”

Still, India’s GDP growth has now been below 5% for four straight quarters. And experts remain pessimistic about the economic recovery.

While external demand has surged, domestic demand continues to be weak. A breakdown shows that “rural demand is fairly strong thanks to a better agriculture performance and continued social sector spending by the government (in light of the forthcoming elections),” said Kundu. But tighter monetary conditions and high inflation have hurt urban demand.

investment conditionsare also poor. “A whole host of investment projects are currently stalled because of bureaucratic issues,” writes Miguel Chanco of Capital Economics.

“Despite the government’s repeated promises to clear the obstacles, which centre on the difficulty of land acquisition, it has made little visible progress.”

India’s struggle to keep its fiscal deficit in check also suggests the government might not increase expenditure. India risks a downgrade from the lowest investment grade to junk if its fiscal deficit worsens. But a “major reduction in populist and wasteful expenditure,” also isn’t likely ahead of the 2014 general elections.

Capital expenditure, which is the least controversial, is the most likely to be cut. The government for instance plans to cut its education expenditure by Rs. 40 billion (approximately $US643 million) even as it raises subsidies. This has prompted experts to wonder whether the government is serious about capitalising on its demographic dividend (i.e. India has one of the world’s largest working age populations).

And high inflation means policymakers will be unable to provide too much support.

India’s economic recovery, looks bumpy at best.

NOW WATCH: Money & Markets videos

Want to read a more in-depth view on the trends influencing Australian business and the global economy? BI / Research is designed to help executives and industry leaders understand the major challenges and opportunities for industry, technology, strategy and the economy in the future. Sign up for free at research.businessinsider.com.au.