ECONOMY WATCH 2013 Lower rates could boost economy in 2013

India Inc Likely To Fare Better On Falling Inflation, Reforms 

New Delhi: After going through a gloomy phase in 2012, the Indian economy is poised to return to a healthy growth trajectory in the early part of 2013-14 on the back of some positive factors. While it may not be a smooth ride due to several risk factors going ahead, investors and economists say the worst may be over for the Indian economy. 
    "We recently met 80-plus institutional investors across asset classes in Europe. While the consensus was that the worst was over, key concerns were (1) execution of reforms to sustain interest, especially if the outlook on other emerging markets (China) improves and (2) economics could be overshadowed by political compulsions by the second quarter of 2013," Rohini Malkani, an economist at Citigroup India, said in a recent research note. In recent weeks, some positive signs have emerged that hold out hope for the future. Industrial growth rebounded in October although it is too early to predict whether it would be sustainable, given the volatility in data. However, other data such as the HSBC Purchasing Managers Index points to an improvement in the manufacturing sector, which should augur well for industrial growth in the months ahead. 
    Inflation, which has emerged as a major policy challenge for the past nearly three years, is also expected to moderate in the months ahead and there is a consensus that it may settle in the 6-7% range by end-March 2013. Perhaps the most crucial factor that should help jumpstart growth and boost investments as well as sentiment would be easing of interest rates. The Reserve Bank of India has signalled its intent to support growth and expectations are that the central bank may cut policy rates in January. 
    Economists say that the much anticipated interest rate reduction, along with the impact of the reform measures announced by the government, should help revive growth. Clearances to mega projects are also expected to be streamlined with the Cabinet Committee on Investments set to approve pending projects. 
    Another major factor that could help the growth momentum would be the 2013-14 Union Budget in February. It could contain some positive measures to bolster the economic recovery, while reiterating the government's commitment to fiscal consolidation. Firm timelines 
about the implementation of the Goods and Services Tax could strengthen sentiment. 
    But skeptics say the Budget could contain populist measures given the spectre of general elections in 2014 and therefore this could pose a risk to the economy. 
    Moderation in global crude oil prices should also help in repairing the health of public finances. Much would also depend on the progress of the government's efforts to control unwieldy subsidies. Analysts and rating agencies will keep a hawk eye on how the cash transfer scheme pans out from January onwards. 
    So, despite many positives for Asia's third-largest economy, risks also loom large. Events in global economy will also have a huge impact on how the Indian economy fares in 2013. The situation in the United States and Europe would have a major bearing on prospects for the domestic economy. 
    Global rating agencies, which have cautioned India about its rating being downgraded to junk status, would be closely watched for any action. And finally, the progress of reforms would be the key to sustaining and accelerating the growth momentum. Any adverse developments on the political front could have a dampening effect on the economy and may reverse the recovery.