beyondbrics

After months of bad news flow – high inflation! interest rate hikes! corruption! high petrol prices! weak currency! – India is finally getting some good news, even if it’s a good two years off.

In 2013, according to an Ernst & Young report released Monday, India will grow at 9.5 per cent, bouncing back from this year’s 7.2 per cent, and outpacing China’s projected 9.2 per cent.

But the report’s projections might be a tad optimistic, given that they are premised on: 1) whether India’s inflation – which hit 10.6 per cent for food articles earlier this month – will fall by the end of this year, and 2) that the US and EU economies do not fall into recession.

From the report:

Provided India’s inflation does start to fall back by the end of this year, and the US and EU economies do not slip back into recession, the ‘soft patch’ for Indian growth should be relatively short-lived. Once inflation is in check, and interest rates are no longer rising, consumers will be more willing to spend, supporting a general improvement in the business environment, with growth steadily accelerating during 2012.

Even though the Reserve Bank of India is likely to raise interest rates on Tuesday for the 13th time since March 2010, inflation – which rose 9.72 per cent in September from 8.98 per cent a year earlier, slightly lower than August’s 9.78 per cent rise – is unlikely to taper off toward a more manageable 7-7.5 per cent until at least March or April, economists told beyondbrics.

Meanwhile, the situations in both the euro-zone and the US are precarious enough that recession remains a significant part of the conversation.

While the accuracy of the forecasts is disputable, what isn’t is India’s need for some good news.

The country’s growth story have taken a beating in recent months, as the mushrooming fiscal deficit, persistent inflation, and fiscal policy inaction have eaten away at some of the hype surrounding it.

But E&Y believes that the effectiveness of the RBI, which has been particularly hawkish in using monetary policy to combat inflation in the face of chronic fiscal inaction, at keeping prices in check, could mean interest rates could soon start to come down again. This in turn should spur growth.

The report projects that real GDP growth should hit 8 per cent by 2012, and 9.5 per cent by 2013 before settling back down to 9 per cent in 2014 and 8.2 per cent in 2015.

However, Shubhada Rao, president and chief economist at Yes Bank, told beyondbrics that while growth above 9 per cent was feasible, it is not going to happen in the near future.

“For 9 per cent plus growth, you need a conducive global environment, which we don’t see happening in the next two years, and we also need to see global growth going to 4 per cent plus levels,” she said. It is “a combination of both [global and domestic factors] – we need significant support on the policy front to facilitate growth through infrastructure” investment and spending.

“We would be somewhere between 7.5-8 per cent in this coming fiscal year [ending March 2012] and in the year ending March 2013,” she added.

China, on the other hand, will grow at 9.2 per cent in 2013, the report projects, meaning India will outpace its Asian rival for the first time.

In a country obsessed with beating China, those numbers will no doubt look good in the pages of some of India’s more nationalist newspapers. But whether it will come true is another matter altogether.

Related reading:
New threats to India’s growth, FT Economists’ forum
India slows, bit by bit, beyondbrics
India: going with the (out)flow, beyondbrics
Rupee heads lower and lower, beyondbrics