News Room - Business/Economics

Posted on 01 Jun 2009

Analysts say India economy headed higher, with reforms in sight

India's economy is on the upswing with eyes now keenly focused on July's planned budget for new market-opening moves by the freshly re-elected Congress government, analysts say.

 

The country logged unexpectedly strong 5.8 per cent growth in the final quarter to March 2009, against forecasts of 5.0 per cent, figures late last week showed, prompting analysts to say the economy had turned the corner.

 

“We see a new growth cycle taking shape with the first stop seven per cent and then eight pern cent," said Rajeev Malik, economist at Macquarie Securities.

 

India's economy expanded by 6.7 per cent in the year to March 2009, down from nine per cent a year earlier.

 

But the country of nearly 1.2 billion people is performing far better than many others caught in the global slump, thanks to its vast, resilient domestic market, hefty government spending and aggressive rate cuts, analysts say.

 

Foreign capital is pouring back into India with the benchmark Sensex share index near a nine-month high of 14,625 following a spurt in May after the Congress party was swept back to power with its biggest seat haul in 18 years.

 

The strong mandate allows the Congress to govern without the support of the communists who propped up the government in parliament during its last term.

 

Economists called the Congress win a "game changer" for the economy because it raises hopes of political stability for the next five years and the introduction of economic reforms that had been blocked by the Left.

 

There has already been a flurry of announcements by new ministers promising such moves as loosening state-controlled fuel pump prices, which would help refinery profits, and cutting mobile call rates to propel India's explosively growing cellular sector.

 

Economic growth is forecast at around six percent in the first half of the year and closer to seven percent in the second amid "green shoots" signs such as higher car sales and cement output.

 

Next year, economists expect expansion of eight percent.

 

"We expect a pick-up in economic activity from lower borrowing costs and higher government spending which is feeding through the system," said Shubhada Rao, economist at Yes Bank.

 

In another positive sign, the Federation of Indian Chambers of Commerce and Industry (FICCI) announced Saturday a sharp upturn in business optimism.

 

Some 57 per cent of 300 firms polled in the final quarter to March declared economic conditions were "moderately to substantially" better - up from the nine per cent in the previous quarter who reported an improvement.

 

"Companies are looking forward to a recovery on the basis of their order books and performance," FICCI economist Anjan Roy said.

 

Economists are now focused on the budget that Finance Minister Pranab Mukherjee has promised to present in the first week of July to see what steps he will take to open up India's still relatively inward-looking economy.

 

Mukherjee said last week the government would press ahead with some long stymied reforms "in the financial sector and real economy" to make it more competitive and draw foreign investment.

 

The government may privatise some state-owned firms and raise foreign-ownership caps in insurance and aviation as well as possibly broadening overseas investment access in retailing.

 

But Mukherjee said his "top priority" was "reviving the growth momentum" and helping the poor and he would step up spending even if this meant scant progress in closing India's yawning fiscal deficit, which at 6.2 percent is at a seven-year peak.

 

HSBC economist Robert Prior Wandesforde forecast no "big bang" reforms in a country where economic changes can provoke huge debate.

 

But "even if they (the government) do a few things, the multiplier effect will be quite significant," said Macquarie's Malik.