Asia Economy

Is India’s recovery already over?

Too risky to speculate on India: Ambit Capital

India does not appear to have much wind in its sails at the start of 2014 if the recent bout of disappointing economic data is anything to go by, which is raising doubts over a sustained recovery in Asia's third-largest economy.

Industrial production unexpectedly contracted for the second consecutive month in November, falling 2.1 percent on-year, reflecting recessionary conditions in the country's industrial sector. Meanwhile, export growth - a bright spot in recent months - decelerated to a mere 3.5 percent on year in December, down from a recent high of 13 percent in August.

Robert Prior-Wandesforde director of Asian economics research at Credit Suisse says while it's tempting to be bearish about growth expectations for the December quarter and beyond, he's not prepared to throw in the towel yet.

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"Agricultural output growth almost certainly bounced back strongly in the final three months of the calendar year. Meanwhile, services growth should also benefit from a favorable base effect and improved financial market conditions," Prior-Wandesforde, who forecasts growth of 5.2 percent in the final quarter of 2013, wrote in a note on Monday.

India's economy began a feeble recovery in the July-September period, expanding 4.8 percent - a touch faster than the 4.7 percent growth in the previous three months. The gross domestic product (GDP) data for December quarter is due on February 28.

New Delhi, India
Patrick Horton | Lonely Planet Images | Getty Images

Sonal Varma, chief India economist at Nomura says recent data are exaggerating the growth slump, citing the industrial production reading that was distorted by a loss in working days owing to the festival season.

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"The slowdown in the industrial sector is coming to an end. But we expect a prolonged bottoming out process as there are no visible triggers for an up-cycle at this stage," said Varma, who forecasts 4.6 percent growth for the December quarter.

Varma expects growth will remain steady in a 4.5-5 percent range for the foreseeable future as stronger rural and external demand offsets impending cuts in fiscal spending as the government attempts to meet its ambitious fiscal deficit target of 4.8 percent of GDP.

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Another growth driver will be a pickup in investment activity in areas such as power, telecom, roads, and ports, according to Taimur Baig chief economist, Asia at Deutsche Bank. The Cabinet Committee on Investments has cleared a large number of projects in 2013 amounting to $64 billion, the impact of which is likely to be felt from this year onward, he said.

Additionally, from a monetary policy perspective, Baig says an anemic industrial sector coupled with easing food inflation in December, will likely lead to a pause in the Reserve Bank of India's tightening cycle – a positive for growth.

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"Given the latest data, we think the RBI may just be able to justify no further policy tightening in January. Beyond January, the ground may well be set for a prolonged pause, in our view, with interest rate cuts taking place in the second half of the calendar year," he said.

India's central bank has raised interest rates twice since September 2013 in an effort to combat stubborn price pressures dogging the economy.

—By CNBC's Ansuya Harjani. Follow her on Twitter: @Ansuya_H