Economists expect 2013 to be better for India

Economists at foreign investment banks, such as Deutsche Bank, Bank of America Merrill Lynch (BofA-ML) and Goldman Sachs are painting a rosier picture for the Indian economy in 2013, in the wake of the government’s recent pro-investment measures.

They are forecasting a possible halt to the decline in economic growth rates, thanks to an expected increase in exports, strong local consumption and likely policy rate cuts.

“Clearly, reforms would be helpful in ensuring a durable economic recovery but we think a case can be made for a near-term economic bottom even without major initiatives,” said Deutsche Bank’s economists, Taimur Baig and Kaushik Das, in a client note. Deutsche expects the Indian economy to post a ‘modest’ recovery in 2013, after slowing to about 5.5 per cent this year.

BofA-ML said the decline in economic growth might stop in the December quarter at five per cent, with a poor kharif crop affecting agriculture. The investment bank expects economic growth to hit six per cent in the first half of 2013 and 6.5 per cent in 2013-14, due to the statistical impact of a lower base, hopes of better rain and lending rate cuts. Goldman is projecting a 6.5 per cent growth in the economy in 2013.

The more optimistic growth projections are a contrast to their forecasts earlier this year. At the time, many had pessimistic predictions, in the absence of policy action and higher inflation. Inflation concerns remain but what has changed is that the government pressed the accelerator on implementation of market-friendly reforms in September, which has been cheered by the markets.

“While the economy remains vulnerable to inflation and exchange rate risks, coupled with external shocks and domestic political turbulence, incentives are in place for the authorities to respond with investment-friendly reforms, a dynamic already underway,” the Deutsche Bank economists said.

Economists, including Deutsche’s Baig and Das, warn that the economic outlook is far from sanguine in the near term. “Although reforms should swing sentiment now, we think their impact on the real economy will be felt only in the medium term,” said BofA-ML’s economist, Indranil Sen Gupta, in a client note. Goldman’s strategists, led by Timothy Moe, in a client note, said: “We feel the worst of the policy issues are behind us, confidence in the new finance minister and his team is strong and although India still has many difficult issues to deal with, things are improving at the margin.”