India's growth further decelerated as a slump in industry and investment spread to consumption and exports. Though inflation and the fiscal deficit were reined in, the current account deficit rose to a record high. Delays in resolving structural impediments to growth were compounded by a global trade slowdown. Boosting investment is critical for a return to high growth, but requires reforms to eliminate bottlenecks that are stalling projects. Recent steps to address some of these challenges are expected to help growth pick up modestly.

Economic performance

Economic growth in fiscal year 2012 (ended 31 March 2013) decelerated to 5%, its lowest in a decade, from 6.2% in FY2011. While tepid industrial growth and a downdraft in investment continued from FY2011, the downturn was exacerbated by a slump in services activity, weakening consumption, and contracting exports.

Source: ADB estimates.

Economic prospects

The slowdown in domestic investment in India will need to be reversed for growth to trend upward in a sustained manner. However, recent data from the Centre for Monitoring Indian Economy on planned capital expenditures are not encouraging, as they continue to show a downward trend in announced new projects and an increase in the number of shelved projects. Clearly, turning this trend around will be a major challenge.

Recent reforms include the creation of the Cabinet Committee on Investment to expedite government clearances for large projects and cabinet clearance of a land acquisition bill. However, these are only first steps toward improving the investment climate in India, and further measures will have to be undertaken for the investment cycle to turn around. These would include tough economic and politically difficult policy decisions related to delays in environmental clearances, parliamentary approval of the land acquisition bill that involves complex issues, improving the availability of fuel sources and infrastructure linking fuel sources with power generating plants, and attaining fiscal consolidation without sacrificing capital expenditure.

Various business survey indices present a mixed picture, indicating the need for further action to restore confidence. The central bank’s business expectation index in January deteriorated in comparison with the previous year, though there was some improvement over the previous quarter. The latest reading of HSBC Markit purchasing managers’ index for manufacturing and services is no higher than average levels earlier in FY2012.

Progress on reforms in FY2013 is expected to improve business and consumer confidence sufficiently to underpin a moderate improvement in investment and consumer spending. An upturn in global trade volume and greater budgeted government spending would further add to total demand. With demonstrated results from planned measures to reduce the budget deficit, especially progress on reducing fuel subsidies, the central bank will further ease monetary policy, which would help to sustain and build demand momentum.

A normal monsoon is expected to substantially boost agriculture growth from the depressed base a year earlier. This will strengthen rural consumer demand and ease price pressures. Industry growth should improve on better domestic and external demand, but unresolved structural issues will continue to constrain investment, mining, and power. Services are expected to see a stronger pickup in activity than industry, though growth will continue to be restrained by the limited demand. However, community services could see an uptick with increased government spending in the run-up to an election.

In this scenario, GDP growth nudges up to 6% in FY2013. Improved global prospects, some easing of price pressures, and forward movement in resolving structural bottlenecks would allow India's growth to increase to 6.5% in FY2014.

Source: ADB. 2013. Asian Development Outlook 2013. Manila.

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