India’s slowdown has been faster than expected, with first quarter GDP growing just 5.3 per cent. Analysts have lowered their FY2012 growth projections and ratings agencies have threatened to downgrade the country to junk territory.
Citi analyst Rohini Malkani thinks India’s GDP growth is likely to “skid to a 10 year low” for 5 key reasons:
- “Drought fears are coming true”: Malkani has lowered her FY13 growth forecast to 5.4 per cent and FY14 forecast to 6.2 per cent. And if drought conditions worsen growth could drop to 4.9 per cent this year.
- Politics and policies are deterring investments: Malkani thinks in the last 1.5 years markets have become “increasingly disillusioned with the pace of reform, with a number of investment projects stalled and corruption allegations tainting the incumbent government.” And the emergence of regional parties and Congress’ dismal performance in state polls means they’re starting to play it safe with their politics and economic policies.
- Power outages are impacting growth:The recent power outage that left 50 per cent of the country in darkness, and “anecdotal evidence of worsening power shortages” are all impacting growth. What’s more notified power cuts are at record highs and do not cover a massive chunk of the country that isn’t connected to the power grid.
- Consumer confidence is low and could impact consumption: Unlike the slowdown in investment which is well recorded, declining consumer confidence shows that consumption which has been stable could slow too.
- The weakness in the rupee isn’t helping exports, and exports are impacted by global demand: The share of exports in GDP has increased and while the weakness in the rupee would be expected to boost exports, the composition of India’s exports is dominated by high-value goods, so the weaker rupee is unlikely to have a major impact. Rather exports will be affected by global demand. Export growth is expected to be soft in coming months.
But it isn’t all bad, India still has a domestic demand driven economy, its demographics are strong and it still has a high savings rate. The unwillingness of the political class to implement much-needed reforms has however left investors expecting 5 – 6 per cent growth in the next two years.
Don’t Miss: Why Everyone Is Freaking Out About India >