Moody's Analytics sceptical of growth rate bottoming out

There is no certainty that GDP expansion will not fall further from a decade low growth of 5.1% in 2012

A day after the United Progressive Alliance (UPA)’s report suggested that the decline in economic growth had bottomed out, Moody’s Analytics on Thursday said it was not yet clear whether the rate of growth would fall further from the decade-low of 5.1 per cent reported in 2012.

“India’s growth rate has been steadily slowing for the past two years and it is not yet clear whether the bottom has been reached,” Glenn Levine, senior economist at Moody’s Analytics, said in the research and analysis company’s latest report.

The report, however, said the 4.5 per cent growth witnessed in the  December quarter, slowest since the 2008-09 global recession, had hit  rock bottom.

“GDP (gross domestic product) grew more slowly in the fourth quarter of 2012 than at any time since the 2009 global recession, but we think this was the bottom of the cycle. The pace is expected to pick up gradually, with GDP posting growth of five-six per cent for the first half of 2013,” the report said.

For a country  growing above eight per cent yearly as recently as 2011, this is a disappointment, said the report, titled Dismal Scientist-India Outlook: The Restraints on Growth. Against the government optimism that India’s economic growth potential was eight to nine per cent, Moody’s Analytics said it was seven per cent. “India’s potential growth rate is seven per cent, not eight per cent. The days of eight per cent annual GDP growth in India are long gone.”

Blaming elevated interest rates, weaker global growth, and a stalled economic reform process for slowing growth, Levine said the government’s recent economic reforms, coupled with lower interest rates, should lift India’s growth pace through the second half of 2013, but it would be some time before the economy was expanding at its potential rate.

Lauding the government’s efforts to trim the budget deficit and open sectors such as retailing and aviation to foreign competition as positive developments, the report said it was not yet clear that this would be enough to lift investment in 2013 and 2014.

Global businesses are no longer willing to overlook the difficulties of doing business in India. “In a more sceptical investment environment, the government’s efforts, including lower interest rates, may only have only a marginal impact on sentiment and investment.”

Red tape remains the biggest obstacle to investment and  is too entrenched at all levels of Indian bureaucracy to tackle in an expedient way, the report said.

Moody's Analytics today said any of two developments-- messy appointment of Congress Vice President as the Prime Minister after the next polls and Bharatiya Janata Party's (BJP) win in the elections-- is a downward risk to its outlook on India's economy.

"The government may be contemplating the ascension of Congress Party scion Rahul Gandhi should the party win control in the next election. A messy handover of power is a downside risk to the outlook, as is an election win by the main pposition--BJP," a research and analysis wing of Moody's Corporation said in its latest report.

It said BJP has shown little interest in constructive policy.

Pointing out that the next couple of months will be crucial, the report said if the government does not make tangible progress and pass some key bills, the second half of Singh’s second term will be deemed a disappointment.

More than 100 bills await approval by Parliament, yet the legislative budget session was disrupted andParliament adjourned two days early, Moody's Analytics said.

"The prime minister is trying hard to root out corruption—two tainted cabinet members resigned in May—but it is difficult to pass bills with a scandal-ridden minority government," it added.

Yesterday, Parliamentary Affairs Minister that the time had come to project Rahul Gandhi as the UPA's prime ministerial candidate.

Levine said the government created a new Cabinet Committee on Investment to push through stalled projects, so far approving  $27 billion in projects for oil exploration and electricity.

"Restarting these stalled projects will lift investment from mid-2013, but we see few signs that companies are willing to commit enough to pull investment higher soon," he said.

India officially calculates GDP growth on a financial year basis. In 2012-13, economic growth is estimated to have fallen to just 5%, a ten-year low. yesterday, in its report to the people, UPA II had said," Growth is expected to recover in 2013-14 with reform process being actively pursued."

Against the government optimism that India's economic growth potential is eight% or nine%, Moody's Analytics said it is seven%. "India's potential growth rate is 7%, not 8%. The days of 8% annual GDP growth in India are long gone."

In fact, the research arm of Moody's Corporation said even this potential growth is not coming by 2014.

This may dash hope of the Planning Commission to achieve eight% average annual growth in the 12th plan (2012-13 to 2016-17). In the first two years of the plan, the economy grew by average 5.6% a year.

As inflation came down to 41-month low of 4.89% in April, Moody's expected RBI to cut the repo rate in its June review and again in the second half of 2013. It may grow more aggressive in cutting rates if the current account deficit  narrows and the government pushes through key reforms.