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The research and analysis wing of Moody’s, the global rating agency, today cautioned against the spread of a slowing in the manufacturing sector to services in India.
Moody’s Analytics said the economy grew below potential in the first half of 2013. It says reforms have stalled, even as the government hyped its move of raising foreign direct investment caps in certain sectors last week.
Its report did not see much sign of recovery for economic growth in the second half of the financial year as well. “The slowdown that began with a downturn in fixed investment and manufacturing production will soon spread to services and the rest of the economy. This will cap Gross Domestic Product growth at 5.5 per cent for 2013 and six per cent in 2014,” said Glenn Levine, senior economist at Moody’s Analytics.
India’s industrial output contracted at an 11-month low of 1.6 per cent in May and grew at a sluggish 1.88 per cent in April. Among its components, consumer durables were one of the major victims of slow growth. “Automobile sales, a key gauge, have fallen for six straight months and were down nine per cent in June, while commercial vehicle sales were off 13.5 per cent. Imports have also stalled, growing just 1.9 per cent in June,” said Levine.
The report says the government's reforms have stalled and no notable changes are expected before next year's general election, expected in May. It does not think the economy’s mood is likely to go up. "RBI (the central bank) is unlikely to cut interest rates again; the government is paralysed by a weak parliamentary position and by the coming 2014 election; local confidence is down; and foreign investor sentiment has turned against India," said the report. It said expectations were built up since reforms were put in place in September 2012.
However, since then, there has been "parliament gridlocks" and a delayed monsoon session would be dominated by the "populist food security bill", as measures to reform insurance and land acquisition could easily fall by the wayside.
The government had moved an ordinance on food security which entitles 67 per cent of India's population to receive subsidised foodgrain from the government every month.
The report said there is only one upside -- monsoon rain, running 25 per cent above the historical average, providing relief to the farmer. "It is unfortunate that the only good news comes from the heavens above, rather than from those running the economy here on the ground," said Levine.
He was sceptical of any rate cut by the Reserve Bank of India in its coming policy review. "India’s large current account deficit is typically financed by portfolio inflows, fanning currency volatility and weakness when investor sentiment shifts. An interest rate cut would discourage foreign investors and likely weaken the rupee further," said Levine.
