Indian government, the single biggest drag on economy: Moody’s Analytics

Moody's Analytics, a division of Moody’s Corporation that provides expertise in economic and consumer credit analysis, credit research and risk measurement etc has stated that the Indian government is single biggest factor weighing on the Indian economy and is keeping it short of achieving its true potential. The report said that India was growing but below its potential as politics was weighing on the economy. The report termed the UPA Government at the Centre as the “single biggest drag” on business activity. As per the agency, the United Progressive Alliance (UPA) coalition government has lost all momentum and it is unlikely that any substantial progress will be seen on existing bills that cover pressing issues like land reform, fuel subsidies, labour rights, and the much-discussed supermarket reforms, between now and the next national election in 2014.

It also criticized the government for being too populist with the budget which contained various investor-damaging proposals. It is of the opinion that the UPA doesn’t have the numbers or the leaders to push through tough-minded reforms needed to drive the next wave of growth. Other political risks include possible tensions with China, as highlighted by India’s recent missile launch, and the Maoist insurgency spread across nine Indian states. It has predicted that the economy is likely to remain weak through the June quarter before demand sees a modest pickup in second-half. However growth will reach its true potential only after the economy is well into 2013.

As per the report, all sectors of the economy are vulnerable right now with particular weakness in manufacturing and mining, along with a worrying contraction in private investment. Softer global conditions, weak investor and business confidence, government paralysis, and tight monetary conditions are all weighing on demand. Industrial growth has slowed to 2.6% y-o-y across January and February, with sluggishness in the all important capital goods production. Further exports have slowed down due to weak global demand, mirroring weak production. On the other hand, imports have risen by a good 20% (y-o-y). However the rise has been due to higher oil and commodity prices, rather than a strong domestic economy.

Given the situation it is likely that the current account deficit reaches 4% of GDP later this year. As per the report this is a manageable number and looks sustainable, especially with an economy growing at 6%. However it will continue to exert downward pressure on the rupee. It is expected that India’s external imbalance and elevated inflation will drag the rupee steadily lower through 2012 and a sudden bout of global investor risk aversion could prove to be negative for the currency.

There is however still two reasons of optimism for the economy. First, the rate cut announced by the Reserve Bank of India which has confirmed its focus on growth rather than inflation. Secondly the predicted average rainfall in 2012 which is crucial in determining India’s agricultural output, with knock-on effects for rural incomes and consumption. Given the conditions it is expected that the Indian economy will grow solidly but the growth will hover around the 6-6.5% levels. Its potential of 7.5% will however be reached in the second half of 2013.