Reforms to help Indian economy gather pace: Reuters Poll

Reuters: India’s economy will pick up steam this year after its worst performance in a decade as a slew of reforms take hold and the central bank eases policy to spur growth, a Reuters poll found.

But the poll also showed inflation will remain persistently high, preventing the Reserve Bank of India from cutting rates too aggressively, and that economic growth will not soon return to levels as strong as just few years ago.

The poll of 28 economists, taken in the past week, showed India’s gross domestic product will grow 6.4 per cent in the year to March 2014 after likely expanding at a decade-low of 5.5 per cent in the current fiscal year.

That is down from the median consensus of 6.6 per cent for 2013/14 and 5.7 per cent for 2012/13 in a poll in October, marking the seventh straight set of downgrades in Reuters polls for Asia’s third-largest economy. Correspondingly, analysts are not exactly brimming with optimism.

“We expect a shallow growth recovery,” said Sonal Varma, economist at Nomura in a note to clients.

Wilting demand for Indian goods and services from abroad has been a major contributor to the slowdown as many developed economies are either in a recession or close to one.

But one source of good news has been a recent shift in government policy. The government announced reforms late last year which opened up the supermarket and aviation sectors to overseas investors, a move many businesses had been clamouring for, and says more policy moves are in the pipeline.

“A lot of economic reforms are being undertaken. The Ministry of Finance has moved very decisively on certain issues. They are small steps but at least it shows the commitment,” said Vishnu Varathan, economist at Mizuho Corporate Bank.

Even though the proposals met some stiff political and public opposition, the Congress Party-led coalition was able to get a vote of confidence in parliament and implement the reforms. Still, some analysts worry the government may lose its appetite for more politically difficult measures ahead of elections in 2014.

After the RBI refused to lower interest rates, leaving the onus on the government to pull the economy out of a slump, the focus this year will likely return to the central bank.

Wary of stubbornly high inflation, the RBI has kept the repo rate on hold since cutting it by 50 basis points in April, in contrast to other big emerging market central banks in China, Brazil and South Korea that have eased policy more aggressively.

But most economists in a separate poll taken last week expect a 25 basis point (bps) interest rate cut to 7.75 per cent at the RBI’s next policy review on 29 January and medians from the latest poll show the repo rate falling to 7.00 per cent by the end of September.

“We expect the RBI to restart its easing cycle in January but cautiously, with a 25-basis-point repo rate cut. Softer inflation offers the RBI room to rebalance its growth-inflation priorities,” said Siddhartha Sanyal at Barclays Capital

However, relaxing monetary policy will not be easy for the RBI as wholesale price inflation, the country’s main inflation indicator, is expected to remain above the central bank’s perceived comfort level of around five per cent through to at least March 2014. Prices are expected to rise on average 6.6 per cent in the year to March 2014 compared with 6.9 per cent in an October poll.

Headline inflation eased to a three-year low in December from a year earlier, though it remained elevated at 7.18 per cent.

In the latest move to reduce its subsidy bill, the government last week deregulated the price of diesel, the fuel used mostly in transport vehicles, and oil companies will now be able to make small changes independently. Even though the impact of this will likely be gradual, it could lead to a pick-up in inflationary pressures through some second-round effects on the prices of food and other goods.