India's Tentative Economic Recovery

Hopes for a more robust economic recovery in India were damaged by an economic slowdown in that country in the third quarter of this year.  However, there were a number of factors that made this slowdown in the third quarter inevitable and, in fact, the slowdown was not as severe as had been feared.  Moreover, the Indian economy is likely to record higher rates of growth in the coming year as the domestic market in India rebounds and as more economic reforms are enacted.  Nevertheless, dreams of double-digit economic growth rates in India will go unrealized for the foreseeable future.

In the third quarter of 2014, India’s economy expanded by 5.3% on a year-on-year basis.  This was below the 5.7% GDP growth rate that was recorded in the previous quarter, leading many experts to warn that India’s economic recovery was proving to be both weak and short-lived.  However, much of the growth recorded in the second quarter was the result of a surge in government spending and this was not going to be sustained in the second half of this year.  Furthermore, this year’s monsoon season got off to a very weak start, reducing agricultural output in the third quarter.  When these factors are considered, a growth rate of 5.3% is rather respectable, particularly in comparison to the sluggish growth realized in recent years in India.

India’s economic future hinges on two key factors that will determine the direction of the Indian economy in the coming years. First, India’s domestic market is forecast to strengthen in the years ahead as inflationary pressures ease and income levels rise.  With a population of 1.2 billion, this massive market will become India’s key driver of growth in the years ahead.  The second key factor, and the one that faces more obstacles, is the economic reform drive being undertaken by the government of Prime Minister Narendra Modi.  If these reforms are successful, they will lead to major improvements in India’s business climate, infrastructure and retail sector, and each of these improvements will boost economic growth rates in the coming years.  However, despite the government’s firm grip on power, it faces significant opposition to each of these reforms and this will make progress slower than it should be.

As we look ahead at the Indian economy, we are forecasting a gradual acceleration in economic growth over the near-term.  In 2015, we expect the Indian economy to expand by 6.7%, which would represent the highest rate of growth in India since 2010, when the Indian economy grew by a now unreachable 10.3%.  However, once India reaches that level of growth, we are expecting the Indian economy to stabilize in the following years, with GDP growth rates averaging 7.0% over the remainder of this decade.  Higher rates of growth are not foreseen due to a number of factors, including India’s inability to develop a major export-oriented manufacturing sector.  Unfortunately for India, while GDP growth rates of 7% are respectable, they will not do enough to reduce India’s level of poverty, given the country’s high rate of population growth.  For this to occur, much greater economic reforms will have to take place, but this appears beyond the ability of any Indian government at present.